ABSTRACT
This chapter provides a number of practical applications of freight futures and Freight Forward Agreements (FFA) trading positions. It presents freight derivative strategies for banks. The chapter demonstrates that the use of freight derivatives for risk management purposes leads to more flexible business decisions in comparison to the traditional strategies. It discusses the important role of brokers in freight derivative trading. The chapter explains the economics behind the FFA and freight future markets and reviews the most recent empirical evidence in the topic. The main advantage of using the derivatives markets rather than the time-charter market, in order to reduce the exposure to freight rate risk, is the flexibility and lower cost that they offer. The speculator would simply bet on the potential future movements of freight rates and take long and/or short positions in futures contracts in order to benefit from the volatility of freight rates.
