Freight futures are Asian style, meaning that they settle on the average of the underlying spot Baltic index at the end of every month.

For example, a Q4 contract will settle at the end of October, at the end of November and finally at the end of December when it will be closed.

Of course, it is not necessary to hold on to a futures contract until its expiry date. In practice, most traders exit their contracts before their expiry dates. This is done by either selling the contract or purchasing an opposing contract to the original trade.

The clearing houses will also take daily pricing from the Baltic Exchange, in the form of the Baltic Forward Assessments (forward curves) and will use this number to establish the daily mark-to-market position. This is a daily calculation between the trade rate and the daily settlement rate provided by the Baltic forward curves. This is also known as variation margin and simply put, is paid daily from one side of the trade to the other to reflect the current market value of the trade. In practice, money may be drawn from your GCM account to pay the margin or will be received into your GCM account.

As the futures contract converges with the spot price as it approaches maturity, the monthly settlement of the front month future is calculated against the monthly average of the Baltic spot (physical) indices. As before, the difference between the settlement price and the fixed trade price is the amount due / to be received, but this will have been largely settled by the daily mark-to-market leading up to the end of month settlement day.

Examples of how open positions can close.