Forward Freight Agreement (FFA)

If your company is affected by the price fluctuations of freight prices, then a Forward Freight Agreement (FFA) could come in handy as it eliminates the effect of fluctuting freight rates, giving you a fixed rate for a certain period of time. You will be able to stick to your budget and avoid or limit the impact of increases or decreases in freight rates.

FFAs are financial forward contracts allowing e.g. a ship owner or charter to hedge against volatility of freight rates. It also allows for an alternative to ship ownership. The contract owner is given the right to buy and sell the price of freight for future dates. They are used to reduce or eliminate a company's exposure to fluctuating freight rates. 

FFAs are dry freight derivatives, financial instruments that can be tailored to meet the individual company's needs. They are divided into two categories:

• Over-the-counter (OTC) products also called swaps
• Standardised, exchange-trade derivatives known as futures

The value of the FFAs depend on the characteristics and value of the underlying asset. 

Three good reasons to use FFAs:

1. Eliminate freight rate uncertainty due to financial, geopolitical or fundamental factors
2. It is a pro-active strategy for budget protection
3. Insurance against price fluctuations

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