A forward freight agreement (FFA) is a financial

forward contract In finance, a forward contract or simply a forward is a non-standardized contract between two parties to buy or sell an asset at a specified future time at a price agreed on at the time of conclusion of the contract, making it a type of deriva ...

that allows ship owners, charterers and speculators to

hedge A hedge or hedgerow is a line of closely spaced shrubs and sometimes trees, planted and trained to form a barrier or to mark the boundary of an area, such as between neighbouring properties. Hedges that are used to separate a road from adjoin ...

against the volatility of freight rates. It gives the contract owner the right to buy and sell the price of freight for future dates. FFAs are built on an index composed of a shipping route for tanker or a basket of routes for

dry bulk Bulk cargo is commodity cargo that is transported unpackaged in large quantities. Description Bulk cargo refers to material in either liquid or granular, particulate form, as a mass of relatively small solids, such as petroleum/ crude oi ...

, contracts are traded ‘over the counter’ on a principal-to-principal basis and can be cleared through a

clearing house Clearing house or Clearinghouse may refer to: Banking and finance * Clearing house (finance) * Automated clearing house * ACH Network, an electronic network for financial transactions in the U.S. * Bankers' clearing house * Cheque clearing * Cl ...

. Freight futures contracts settle over the average price of spot freight during the corresponding month. Given freight is intangible, there is no physical delivery. Rather, the contracts settle in cash against the arithmetic average price of spot freight published by the

Baltic Exchange The Baltic Exchange (incorporated as The Baltic Exchange Limited) is a membership organisation for the maritime industry, and freight market information provider for the trading and settlement of physical and derivative contracts. It was locate ...

. The Baltic Exchange, on a daily basis, publishes a number of freight assessments for various shipping routes reflecting the prevailing level of shipping rates. Such assessments for the corresponding vessel classes are used to calculate the monthly average that freight futures settle against. For

Capesize Capesize ships are the largest dry cargo ships with ball mark dimension: about 170,000 DWT (deadweight tonnage) capacity, 290 m long, 45 m beam (wide), 18m draught (under water depth). They are too large to transit the Suez Canal ( Suezmax limi ...

freight futures contracts, the weighted average of 5 different routes globally is used to derive the daily 5TC Capesize index; for

Panamax Panamax and New Panamax (or Neopanamax) are terms for the size limits for ships travelling through the Panama Canal. The limits and requirements are published by the Panama Canal Authority (ACP) in a publication titled "Vessel Requirements". ...

, 4 different routes is used to derive the daily 4TC Panamax index; for Supramax, the average of 10 different routes is used to derive the 10TC Supramax index. There are also numerous other assessments reflecting prevailing spot prices for different routes. Freight futures clear through exchanges like other futures contracts, and are subject to similar margin requirements like other futures products. Currently major exchanges provide freight futures clearing, although the most common venues are the

European Energy Exchange European Energy Exchange (EEX) AG is a central European electric power and related commodities exchange located in Leipzig, Germany. It develops, operates and connects secure, liquid and transparent markets for energy and related products, inc ...

(EEX) and the

Singapore Exchange The Singapore Exchange Limited (SGX) is a Singaporean investment holding company that provides different services related to securities and derivatives trading and others. SGX is also a member of the World Federation of Exchanges and the Asian ...

(SGX). Each exchange provides its own rules and its own initial and maintenance margin requirements. The freight derivatives market for dry cargo vessels saw a big increase in traded volumes in 2021. Dry forward freight agreement (FFA) volumes hit 2,524,271 lots, up 61% on 2020. Options trading in the dry market hit an all-time high of 409,255, up 25% on the previous year. The most heavily traded contract was settled against the Baltic Exchange’s panamax timecharter assessment (PTC) which saw 1,202,432 lots traded in 2021. Tanker FFA volumes were down 16% on the previous year, reaching 553,535 lots. Middle East Gulf to China (TD3C) was the favoured tanker contract with 304,719 lots changing hands. One lot is defined as a day’s hire of a vessel or 1,000 metric tonnes of ocean transportation of cargo.

References

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The Baltic Exchange: What is an FFA?

What are freight futures?

2021 record year for dry freight derivative volumes
Derivatives (finance) Ship management Freight transport