FFA Options

Although trading in dry cargo Forward Freight Agreements (FFAs) is a relatively new development, with the first transactions beginning in the early 1990s, the FFA is in reality, an evolution of the shipping option, which is a venerable concept. Shipping options have been around for thousands of years — at least as long as commercial trade between ports and nations.

An option is a contract that gives the buyer the right, but not the obligation, to buy (a “call” option) or alternatively sell ( a “put” option) the underlying instrument at a specified price in the future.

The buyer of a call option will benefit from a rise in FFA prices. Conversely, the seller of a call option will benefit from stable or falling FFA prices.

The buyer of a put option will benefit from falling FFA prices. Conversely, a seller will benefit from stable or rising FFA prices.

The main uses of options are for speculating or hedging. As with any market, there are risks associated with speculating. The advantage of buying an option is that the maximum loss is limited to the premium paid.

Hedging can be thought of as an insurance policy. For example, an owner who wants to protect against a fall in freight prices while preserving the ability to benefit from a rise in prices would buy a put option.

The buyer of an option knows the maximum loss at the time of the trade. A seller knows the maximum profit. Therefore, a seller has an element of risk associated with the transaction, and is most likely to sell an option only at a price that will compensate for that risk.

Options are traded in almost exactly the same way that the underlying FFAs are transacted. Buyers and sellers of options agree on a strike price (the price at which the contract may be exercised), and then negotiate a premium (the price to be paid for the right to buy or sell). The premium is quoted in dollars per day for Time Charters (TC), and dollars per tonne for Capesize routes.

Option contracts are executed between two counterparties through a broker, either as an over-the-counter contract or cleared through NOS, the Norwegian futures and options clearing house and London-based LCH.Clearnet, both of whom already provide specialist FFA and derivative clearing services.

FFA option sizes are the same as the underlying FFA contracts, four quarters of 91 days and yearly calendar periods of 365 days. FFA options also settle in exactly the same way as the underlying FFA contracts, monthly in arrears.

FFA options are European-averaged (or Asian style) and automatically settled at the end of the contract, with no prior notification required.

For further details about FFA Options or to discuss trading opportunities, call +44 (0) 207 090 1120 (London) or +65 6535 5189 (Singapore) email info@freightinvestor.com.