DEFINITION of 'Freight Derivatives'

A financial instrument's value that is derived on the future levels of freight rates, such as "dry bulk" carrying rates and oil tanker rates. Freight derivatives are used most often by end users (such as ship owners and grain-houses) and by suppliers (such as integrated oil companies and international trading corporations) to mitigate risk and hedge against price spikes in the supply chain.

As with all derivatives, market speculators, like hedge funds and individual traders, participate in both the buying and selling of these contracts providing for a new, more liquid, marketplace.

BREAKING DOWN 'Freight Derivatives'

Freight derivatives now include exchange-traded futures (ETFs), swaps futures and the older "Forward Freight Agreements", which were sold over-the-counter. Freight derivatives are most often used to hedge risks against large swings in price, a model popularized in the agriculture and commodities industries.

Freight derivatives are a relatively new product in the global marketplace, but the advent of clearing services has brought increased safety, and with it liquidity, into the business.

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