FFA

An FFA (forward freight agreement) is an over-the-counter freight derivative, a cash-settled contract for difference that fixes a freight rate or timecharter hire today for a future period on a defined Baltic route or basket. The buyer and seller agree a contract price; at settlement the contract pays the difference against the floating settlement price, the arithmetic average of the relevant Baltic spot index over the determination period (usually a calendar month). FFAs are arranged by brokers OTC and given up for clearing to CME, EEX, SGX, ICE, LCH, or Nasdaq, which removes counterparty risk through margin. Owners sell FFAs to lock in earnings; charterers and traders buy to cap freight cost.