Freight derivatives first appeared in the maritime sector in the 1980s, when Baltic Exchange introduced BIFFEX (Baltic International Freight Futures Exchange) in 1985. BIFFEX was an official stock exchange where you could buy and sell futures. BIFFEX was based on an index called BFI, which was the result of daily broker valuations and a mathematical formula, while it operated like any other futures market (e.g.B. oil). All trades were anonymous and guaranteed by the London Clearing House, while contracts, trading dates and periods and other financial and legal requirements were detailed. Once the trading account was opened and all the conditions met, the client was able to buy or sell future contracts. BIFFEX was operational until 2002, as it experienced very busy periods for almost 15 years, but interest eventually decreased due to the use of forward freight agreements (FFA) instead of BIFFEX. As we know, shipping is a very risky and volatile sector. In the past, both the dry bulk market and the tanker market have fallen sharply or increased in a matter of days, and forecasts are very difficult (in the short term), if not impossible (in the long term). To manage their market risks, market participants can use different instruments. Fixing a ship on bareboat working/charter time is a traditional solution that is used to secure your income (shipowners) or transport costs (charterer) for a set period of time. However, this measure is not at all flexible, given that the vessel is tied over a long period of time and exiting from an exercise contract can be costly.
Fleet diversification is another traditional instrument used by shipowners. By diversifying the fleet, a shipowner participates in several markets where market risks are shared. To overcome the disadvantages of traditional market risk management strategies, a more advanced tool has recently been developed: freight derivatives. Let`s see what freight products are, their history and use in the marine industry, and how they work. . . .