What are freight derivatives?

Freight derivatives provide a means of hedging exposure to freight market risk through the trading of specified time charter and voyage rates for forward positions.

Settlement is effected against a relevant route assessment, usually one published by the Baltic Exchange.

Forward Freight Agreements (FFAs) are 'over the counter' products made on a principal-to-principal basis. As such, they are flexible and not traded on any exchange.

The most frequently traded tanker FFA contracts are future derivatives of the TD3 (Tanker Dirty Route 3), which is the most common trade route into Asia for a Very Large Crude Carrier (VLCC) carrying 260.000 metric tons of Non-Heat Crude from Saudi Arabia to Japan.