The forward curve is a key indicator of market expectations and future freight price trends.
The forward curve provides a user with the market participants’ valuation of the future spot price, on that day, for each contract time period, e.g. the front month, or Q3 next year, or the full Calendar price etc. This provides valuable visibility of potential freight costs and is therefore a handy tool to negotiate and secure freight income and control freight costs.
The terms contango or backwardation are often used in relation to the forward curve. Freight forward curves can show a market in backwardation where the forward price of the derivative contracts is lower than the spot price. A trader may try to use this to their advantage by selling the front months and buying the lower priced forwards.
Conversely, a curve in contango shows future prices trading at a premium to the spot price and trading strategies will take this into consideration.
Forward curves move throughout the year between showing markets in contango and backwardation; this can be related to seasonality or other events in the underlying physical market.
The end of day Baltic Forward Assessments are used by the clearing exchanges as the daily settlement rate.