The Strategy Of Shipping Companies Applicate Freight Derivatives

In recent years, apart from current pessimistic global economic, the outlook of international marine transportation is also clouded by the risk of the vessel oversupply and the gap between demand and supply of the carrying capacity. For shipping companies in our nation to survive this situation, it’s important to keep earnings profitable and lower the expenditure of time chartering freight rate. Freight derivatives have functions like hedging, price discovery and speculating, and can be used with the actual shipment, it became a popular tool. Most companies in our nation using this tool failed, resulting in that quite a number of companies are afraid to participate in this market. If we don’t study this tool quickly and deeply enough, we’ll have to take whatever the market offers passively.Forward Freight Agreement(FFA) and freight option are two major tools for bulk carriers and tankers, as container ship companies can use the index futures, and FFA is the most popular one of them. There are several factors for the FFA deals, but it has an advantage that one can compute the result before hand when using it for hedging. Companies can lower the price risk by making portfolios wisely. Therefore, this paper will start from the means of making right portfolios. This paper elaborates the definition, operation and basic rules of FFA, freight option and freight index futures firstly, then states the situation of the international maritime transportation and the risk that the shipping companies are facing, and sorts out means shipping companies to hedge these risks. Then, by analyzing the cases of companies engaging in the freight derivative market home and abroad, come to the conclusions and make some advices for shipping companies.