The Executive Summary of

Freight Derivatives & Risk Management in Shipping

by Manolis G. Kavussanos & Ilias D. Visvikis

Summary Overview:

Shipping is one of the most volatile industries in the global economy. Freight rates can collapse or spike within weeks, asset values swing dramatically, bunker costs fluctuate unpredictably, and macroeconomic shocks transmit instantly across trade lanes. Freight Derivatives & Risk Management in Shipping matters because it addresses a core executive challenge: how to manage financial risk in an industry where revenue volatility is structural, not cyclical.

For shipowners, charterers, operators, traders, financiers, and lenders, unmanaged freight risk translates directly into earnings instability, balance-sheet stress, and strategic paralysis. This book provides a rigorous yet practical framework for understanding how freight derivatives—such as Forward Freight Agreements (FFAs), freight futures, options, and swaps—can be used to hedge exposure, stabilize cash flows, and support long-term decision-making.

At an executive level, the book answers a fundamental question:
How can shipping companies move from speculative exposure to disciplined, risk-adjusted performance?

About The Authors

Manolis G. Kavussanos is one of the world’s leading academic authorities on shipping economics, freight markets, and maritime risk management, with decades of peer-reviewed research widely cited by industry and policymakers.

Ilias D. Visvikis is a recognized expert in freight derivatives, shipping finance, and maritime risk modeling, with strong links between academic research and industry application.

Their combined strength lies in bridging theory and practice—explaining complex derivative instruments while grounding them in the operational and financial realities of shipping markets.

Core Idea:

At the heart of Freight Derivatives & Risk Management in Shipping lies a clear strategic proposition:

Shipping companies must actively manage freight rate risk using financial instruments—rather than relying solely on operational flexibility or market timing.

The authors argue that:

Freight rate volatility is unavoidable
Spot market exposure amplifies earnings risk
Asset values and freight rates are tightly linked
Financial risk can be separated from operational decisions

Risk should be managed—not endured—and freight derivatives allow shipping firms to hedge volatility without sacrificing commercial flexibility.

Key Concepts:

Freight Rate Volatility Is Structural

Shipping markets are inherently volatile due to:

Cyclical supply dynamics
Long vessel lead times
Inelastic short-term demand
Macroeconomic shocks

Freight volatility is not an anomaly—it is the normal state of shipping markets. This makes risk management a permanent requirement, not a tactical choice.

Separation of Commercial and Financial Risk

A central contribution of the book is the separation of:

Operational decisions (deployment, chartering, routing)
Financial exposure (freight rate risk, earnings volatility)

You can hedge freight risk without locking in operational strategy. This separation allows firms to remain commercially agile while financially protected.

Forward Freight Agreements (FFAs) as Core Hedging Tools

The book provides detailed analysis of FFAs as the primary freight derivative instrument.

FFAs allow participants to:

Hedge future freight exposure
Lock in revenue or cost levels
Speculate on freight rate movements

FFAs convert unpredictable freight income into manageable financial outcomes. The authors emphasize proper hedge design over speculative use.

Futures, Options, and Swaps in Shipping

Beyond FFAs, the book explores:

Freight futures (exchange-traded)
Freight options (asymmetric risk protection)
Swaps for customized exposure

Derivative choice should match risk profile—not market fashion. Options, in particular, are highlighted for protecting downside while retaining upside.

Basis Risk and Imperfect Hedging

A key risk in freight derivatives is basis risk—the mismatch between:

Physical freight exposure
Derivative settlement indices

Hedging reduces risk—it does not eliminate it. Executives must understand index construction, route correlation, and timing effects.

Risk Measurement and Modeling

The book introduces quantitative tools for:

Measuring freight risk
Assessing hedge effectiveness
Evaluating volatility and correlation

Risk that is not measured is not managed. This reinforces the need for analytical capability inside shipping organizations.

Freight Derivatives and Corporate Performance

The authors demonstrate that effective hedging:

Reduces earnings volatility
Improves cash-flow predictability
Supports capital investment decisions
Enhances creditworthiness

Stable cash flows increase strategic freedom and financial credibility. Risk management becomes a competitive advantage.

Speculation vs. Hedging

The book draws a sharp distinction between:

Risk mitigation (hedging)
Risk taking (speculation)

Derivatives amplify outcomes—discipline determines whether that is beneficial or destructive. Clear governance and policy frameworks are essential.

Market Liquidity and Transparency

The effectiveness of freight derivatives depends on:

Market liquidity
Counterparty risk
Clearing mechanisms

Risk transfer is only as strong as the market infrastructure supporting it. The authors highlight the role of exchanges and clearing houses in reducing systemic risk.

Strategic Integration of Risk Management

Risk management should not be isolated within finance departments.

Freight risk management is a strategic function—not a back-office activity. Commercial, operational, and financial teams must be aligned.

Freight volatility is not an anomaly, it is the normal state of shipping markets.

Executive Insights:

Freight Derivatives & Risk Management in Shipping reframes shipping leadership as risk-aware capital stewardship.

Strategic Implications for Executives and Boards:

Volatility must be actively managed
Hedging supports—not limits—strategy
Derivative misuse can destroy value
Governance is as important as instruments
Risk transparency improves decision quality
Financial discipline enhances resilience

Companies that ignore freight risk gamble their balance sheets on market cycles.

Actionable Takeaways:

For Shipowners & Operators

Define a formal freight risk policy
Separate hedging from speculation
Match derivatives to physical exposure
Build internal risk literacy

Quantify freight exposure explicitly
Measure hedge effectiveness
Integrate risk management into budgeting
Engage with clearing and credit risk controls

Assess risk governance maturity

Final Thoughts:

Freight Derivatives & Risk Management in Shipping is a foundational work for leaders who recognize that shipping is not just an operational business—it is a financial risk business. Manolis and Kavussanos show that freight derivatives, when used intelligently and governed properly, transform volatility from a threat into a manageable strategic variable.

In an industry defined by cycles, uncertainty, and shocks, the lesson is clear:

You cannot control freight markets.
But you can control your exposure to them.

Those who master freight risk management do more than survive cycles—they build resilient, investable, and strategically agile shipping enterprises.

The ideas in this book go beyond theory, offering practical insights that shape real careers, leadership paths, and professional decisions. At IFFA, these principles are translated into executive courses, professional certifications, and curated learning events aligned with today’s industries and tomorrow’s demands. Discover more in our Courses.