Forward freight agreement

A cash-settled freight derivative used to hedge or speculate on future freight and time-charter rates. The two parties agree a price for a given route and period; at settlement the contract pays the difference between that price and the average of the relevant Baltic Exchange index over the period. A dry-bulk owner fearing a weak market can sell FFAs to lock in earnings; a charterer fearing a rally can buy them. Settlement uses the Baltic indices, which is why the Exchange’s assessment integrity matters to the derivative market.