Options on Freight Rates

Abstract

As we saw in the previous chapter, the use of FFAs as a trading and speculative instrument has been increasing constantly since their introduction in the early 1990s. As the market grows and becomes more mature, market participants also look at exploring the usefulness of other derivatives instruments, most notably options. Although FFAs provide reasonable hedging strategies and enable participants to lock in a given freight rate over a period of time, they lack the flexibility that would enable their users to maintain the hedge if the market moves against them, and to be able to participate in the market when market conditions are favourable. Option contracts, on the other hand, offer this flexibility. Freight options are traded as OTC instruments, in the same fashion as FFAs, and over recent years they have become more popular with shipping-market practitioners. Shipping-freight options were first introduced in 1990 when trading options on BIFFEX started. Like the BIFFEX contracts however, trading on these options never picked up and eventually they were de-listed in April 2002.