Forward Freight Agreements (FFAs)

A forward freight agreement is a bet on a number, settled in cash, against a freight index that nobody can move. Two parties agree a freight figure for a future month. At the end of that month the Baltic Exchange publishes what the relevant route or basket actually averaged, and the party on the wrong side of the move pays the difference. No vessel sails, no cargo loads, no charter party gets signed. The whole contract lives on the published index, which is exactly why a trusted index has to exist first: the FFA cannot settle without it. For the route codes, panel mechanics, and the basket definitions that supply that settlement reference, see Baltic Dry Index and freight indices. This article is the other half of the pair. It covers what the contract is, how the hedge works with the arithmetic shown, who clears it, and how the related bunker swap covers the fuel side of the same voyage.

An FFA exists because freight is one of the most volatile inputs in shipping, and a shipowner or charterer often knows months ahead that they will be exposed to a rate they cannot yet fix. The FFA settlement calculator does the cash-settlement arithmetic for a single position, taking the agreed strike, the realized index average, the contract size, and the buy-or-sell direction, and returning the profit or loss. The numbers worked through below are illustrative and hypothetical; the calculator lets a reader put real figures through the same formula.

What an FFA actually is

An FFA is a cash-settled forward, or equivalently a swap, on a freight level. The Baltic Exchange describes it plainly: a financial forward contract that lets shipowners, charterers, and other participants hedge against freight-rate volatility. The “forward” part means the price is agreed today for a defined future period. The “cash-settled” part means that at expiry, instead of anyone delivering a service, the two parties exchange cash equal to the gap between the agreed level and the realized index. The contract is purely financial. It references a freight market; it is not itself a freight market.

The reference is always a published Baltic Exchange assessment. On the dry side, the headline products settle against the timecharter baskets: the Capesize 5TC, a five-route timecharter average, the Panamax basket, and the Supramax basket. On the tanker side, FFAs settle against the dirty (BDTI) and clean (BCTI) route assessments, the TD and TC routes quoted on Worldscale. The contract specifies which route or basket it tracks, the period (a month, a quarter, or a calendar year), the agreed level, and the contract size. Everything else follows from the index.

The settlement convention is Asian-style, and that detail matters more than newcomers expect. An Asian-settled contract does not pay off against a single closing print on the last day. It pays off against the average of the underlying index over the whole settlement period. For the dry timecharter baskets the reference is the arithmetic mean of the daily basket figure across every index publication day in the contract month. For some voyage-route products the convention is the average over the last seven days of the month rather than the full month. The averaging is deliberate. It stops a single squeezed day from dictating the settlement of a contract that everyone understood as a view on a month’s freight, and it makes the index far harder to push around on expiry.

So a Capesize 5TC FFA for, say, the August contract does not settle on the 31 August figure. It settles on the mean of the daily BCI 5TC timecharter dollar-per-day assessment over every publishing day in August. If that mean comes out above the level the contract was struck at, the seller of freight pays the buyer; if below, the buyer pays the seller. The arithmetic is the same whichever route underlies the trade. The unit changes: dry timecharter baskets are dollars per day, voyage routes are dollars per tonne, tanker routes are Worldscale points converted to a settlement value.

Contract size and how the cash is computed

A dry timecharter FFA is quoted in dollars per day and sized in days. A standard lot is one day per month for the contract period, so a calendar-year Capesize FFA of one lot per month covers the days in each of the twelve months. The cash settlement for a position is the difference between the realized index average and the agreed level, multiplied by the number of days, multiplied by the number of lots.

The sign depends on the side. A seller of the FFA (short freight) profits when the index settles below the strike and pays when it settles above. A buyer (long freight) is the mirror. Because the daily figure is multiplied by the days in the period, a small move in the index across a year-long strip is a large cash number, which is what makes freight hedging worth the operational effort and the reason margining and credit control sit at the center of the cleared market.

For a voyage-route FFA quoted in dollars per tonne, the size is in lots of tonnes rather than days, but the structure is identical: the gap between the agreed dollar-per-tonne level and the realized average dollar-per-tonne assessment, times the contract tonnage, times the lots. The FFA settlement calculator handles either unit, because the formula is one formula with the unit carried by the inputs.

Hedging mechanics, worked through

The point of an FFA is to fix a freight outcome before the physical fixture is done. An owner who knows a ship comes open in a few months, and who fears the market falling before then, can lock in today’s forward level by selling an FFA. A charterer with cargo to move in the future, who fears the market rising, locks in by buying. Both work because the FFA settles against the same index the physical market tracks, so a loss on one side is offset by a gain on the other. The hedge is never perfect, because a single ship is not the index, but it is close enough to take most of the rate risk off the table.

Here is the owner’s case, with hypothetical numbers chosen only to show the arithmetic. An owner expects a Capesize to come open in three months and worries the spot market will weaken before then. The forward market for the relevant month is trading at 20,000 dollars per day. The owner sells one strip covering the month, locking that 20,000 figure. Three months pass and the market has indeed fallen: the physical ship fixes at a TCE of 14,000 dollars per day, and the BCI 5TC index for the month averages 14,000 as well. The physical fixture earns 6,000 dollars per day less than the owner hoped. The FFA, sold at 20,000 and settling at 14,000, pays the owner the 6,000-dollar gap times the days in the month. The paper gain offsets the weak fixture. The owner has, in effect, fixed the ship at 20,000 regardless of where spot went.

Run the same trade with the market rising instead, to show the symmetry. Spot strengthens, the physical ship fixes at 26,000 dollars per day, and the index averages 26,000. The physical side now earns 6,000 more than the forward level. The FFA, sold at 20,000 and settling at 26,000, costs the owner 6,000 per day. The paper loss cancels the physical windfall. The owner ends at 20,000 either way, which is the whole purpose of a hedge: it removes the upside as well as the downside. An owner who wanted to keep the upside would not hedge, or would buy an option instead of selling the forward.

The charterer’s hedge is the mirror image. A steel mill that knows it must move iron ore from Brazil in four months, and fears freight rising, buys the forward at today’s level. If freight rises, the higher physical fixture is offset by the gain on the long FFA; if freight falls, the cheaper fixture is offset by the loss on the FFA. Either way the charterer has fixed a freight cost into its raw-material budget months before the cargo books. A commodity trader pricing a delivered cargo does the same to protect a margin that depends on a freight assumption.

Why the hedge is not perfect

The offset is never exact, and a desk that treats it as exact gets hurt. The gap between the hedge and the physical outcome is basis risk, and it has three main sources. First, a single ship is not the basket: a specific Capesize on a specific route does not earn the 5TC average, it earns its own TCE, which can run above or below the basket depending on position, speed, and the route mix. Second, timing: the FFA settles on the month’s average, but the physical fixture is struck on one day, so the two reference slightly different slices of the market. Third, the standard reference vessel inside the index differs from the real ship, so even a perfectly timed fixture on the index route earns a different number.

Basis risk is why a hedger sizes the position to the exposure, watches which route best matches the ship’s trade, and accepts that the hedge takes off most, not all, of the rate risk. It is also why the choice of contract matters: a Capesize owner hedges on the Capesize basket, not the BDI, because the BDI blends three vessel classes and would track the ship far more loosely. The time charter equivalent calculator converts a specific fixture into the dollar-per-day unit the dry FFAs are quoted in, which is the first step in sizing any freight hedge against a real ship.

Dry and tanker FFA products

The dry FFA market is built on the Baltic timecharter baskets, because those baskets are what owners and charterers actually plan around. The Capesize contract settles against the 5TC, the five-route Capesize timecharter average. The Panamax contract settles against the Panamax timecharter basket, the Supramax against the Supramax basket. Exchanges list these as monthly, quarterly, and calendar contracts, so a participant can hedge a single month or take a view out several years on the forward curve. SGX, for example, lists dry bulk timecharter basket FFA futures across the Capesize, Panamax, Supramax, and Handysize classes, each settling against the corresponding Baltic basket average.

The route count inside each basket is a function of how dispersed that class’s trading is. The Capesize 5TC is five routes; the Panamax basket is built from four; the Supramax basket draws on a larger set, ten or eleven routes depending on the contract generation, reflecting how scattered Supramax cargoes are across many ports and minor bulks. EEX, when it expanded its dry freight suite from 25 November 2024, listed a Baltic Supramax 11TC month future alongside Capesize and Supramax month options, which shows the basket definitions evolving as the underlying index methodology is revised. A hedger always confirms which basket generation a given listed contract references, because the index providers reweight and re-route the baskets periodically.

Tanker FFAs settle against the Baltic dirty and clean tanker route assessments. The dirty contracts reference TD routes such as the VLCC Middle East Gulf to China trade; the clean contracts reference TC routes such as the Continent to US Atlantic Coast gasoline route. Tanker routes are assessed on Worldscale, so a tanker FFA’s settlement value comes from the average Worldscale assessment over the period, converted to the contract’s settlement terms. The hedging logic is identical to dry: a product-tanker owner expecting a clean ship open in two months sells the relevant TC route forward; a refiner needing to move gasoline buys it. For the Worldscale mechanics that price the underlying tanker routes, see the freight-indices article.

The unit difference changes how a tanker hedge reads, so it is worth showing the arithmetic on a dirty-route trade, again with hypothetical figures. A VLCC owner expecting a ship open in the Gulf next month, and fearing a soft crude-tanker market, sells the TD route forward. Many tanker FFA contracts are quoted and settled as a dollar-per-day TCE rather than a raw Worldscale number, because the exchanges convert the Worldscale route assessment to a daily equivalent for the standard ship; suppose the forward sits at 30,000 dollars per day. The month plays out weak, the route averages a TCE of 22,000 dollars per day, and the owner’s physical voyage earns close to that. The short FFA, sold at 30,000 and settling at 22,000, pays the 8,000-dollar gap times the contract days, offsetting the poor physical month. A tanker hedger reading a Worldscale-quoted contract instead of a TCE-quoted one runs the same subtraction in Worldscale points and applies the contract’s stated dollar value per point, which is why confirming the quotation basis is the first thing a tanker desk checks on a new contract.

LNG freight is the newest FFA frontier. Spark Commodities publishes LNG freight assessments that underpin listed LNG freight futures, and EEX added Baltic LNG freight month futures to its November 2024 launch. LNG freight FFAs settle in dollars per day, like the dry timecharter baskets, even though the ships and cargo are specialized. As a contract family it is thinner and less standardized than dry or tanker freight, so participants cross-check assessments against fixture reports more than they do in the mature markets.

Market structure: OTC versus cleared

An FFA can live in one of two worlds, and the same economic contract can move between them. In the first, it is a bilateral over-the-counter agreement. In the second, it is a cleared, exchange-registered future. The cash flows are the same; the counterparty risk is completely different.

The OTC market and FFABA terms

The original FFA market is over the counter. Two principals, an owner and a charterer, or any two parties willing to take freight risk, agree a trade, usually through a broker who matches the two sides and circulates the recap. The contract runs on the standard terms published by the Forward Freight Agreement Brokers Association, the FFABA, which the Baltic Exchange hosts. The FFABA standard contract fixes the legal architecture so that every bilateral FFA reads the same way: the agreed route or basket, the contract period, the contract rate, the contract size, the settlement reference, and the payment terms. Standardized terms are what let a broker arrange a trade between two counterparties who have never dealt with each other and have both sides understand the same obligations.

The weakness of a purely bilateral FFA is counterparty credit risk. If the market moves and the losing side cannot pay at settlement, the winning side has a claim but not the cash. Through 2008 and 2009 the freight market saw exactly this: large mark-to-market swings on bilateral books and defaults that left counterparties chasing money they had legitimately won. That experience pushed the market toward clearing, where a clearing house stands between the two sides and guarantees performance against margin.

Cleared freight futures and the clearing house

In the cleared model, the bilateral trade is registered with a clearing house, which novates it: the clearing house becomes the buyer to the seller and the seller to the buyer, so neither original party faces the other’s credit any more. Both face the clearing house. To protect itself, the clearing house collects initial margin when the position opens and variation margin as the position is marked to market each day, so a participant whose position moves against them pays the loss daily in cash rather than accumulating an unpaid claim to settlement. That daily mark-to-market is the structural difference from a bilateral FFA, and it is why a cleared book consumes working capital that an OTC book does not.

Several clearing houses clear freight derivatives. SGX clears dry bulk FFAs through the service it launched as AsiaClear in 2006 and is a major venue for dry freight clearing. EEX lists and clears dry and LNG freight futures, with the trades cleared through European Commodity Clearing (ECC), its clearing arm. CME and Nasdaq have also operated in freight clearing; the freight and commodities business that traded as Nasdaq Futures (NFX) was transferred to EEX Group, with open dry bulk freight positions novated to EEX’s clearing houses. LCH cleared dry freight from 2001 and later moved out of that business. The competitive map shifts as houses enter and exit, so a participant confirms the current listing venue and clearing house for a specific contract rather than relying on a fixed picture. This article does not state any clearing house’s market share, because those figures move and the often-quoted numbers vary by source and date.

The choice between OTC and cleared is a real trade-off. A cleared future removes counterparty risk and gives a transparent forward curve, at the cost of daily margin calls that tie up cash and can force a hedger to fund variation margin on a paper loss long before the offsetting physical gain is realized. A bilateral FFA avoids the margin drag but carries the credit exposure that clearing was built to remove. Large commercial hedgers often run a mix, clearing where liquidity is deep and dealing bilaterally where a tailored period or route has no listed contract.

How a trade is agreed

A freight derivative trade is built from a small number of fields, and the negotiation fixes each one. The route or basket sets what the contract tracks. The period sets the settlement window: a single month, a quarter (three consecutive months settled together), a calendar year (the twelve months of a year), or a custom strip. The contract size sets the days or tonnes. The level, the agreed dollar-per-day or dollar-per-tonne figure, is the price the two sides negotiate. Once those are agreed the rest follows from the FFABA standard terms or the exchange specification, so the conversation between two desks is short: route, period, lots, price, cleared or not.

A broker sits in the middle of most trades. The broker shows a market, the bid and offer running on each period from the firms it talks to, matches a buyer to a seller, and circulates a recap that records the agreed terms. In a cleared trade the recap is then registered with the chosen clearing house, which novates it and starts the daily margining. The broker’s value is the same one the FFABA terms provide at the contract level: it lets two parties who do not know each other transact on terms both understand, with a written record of exactly what was agreed. A mispriced or mis-stated field on a recap is a real operational risk, which is why desks reconcile every recap against their own trade ticket before it goes to clearing.

Liquidity is uneven across the curve, and a hedger plans around it. The front months and the nearby quarters on the headline dry baskets trade actively, so a hedge there fills near the screen price. Further out the calendar, or on a thinly traded route, the spread between bid and offer widens and a large order can move the level against the party placing it. An owner hedging a ship that comes open three years out may find the relevant calendar contract trades by appointment rather than continuously, and sizes the hedge to what the market can absorb rather than to the full physical exposure.

Bunker hedging and the bunker swap

Freight is not the only volatile number on a voyage. Fuel is the other, and on many voyages it is the largest single variable cost. An owner on a voyage charter pays for the bunkers; a timecharterer who has taken a ship on hire pays for the bunkers it burns. Either party can find that a freight hedge alone leaves them exposed, because fixing the freight a ship earns does nothing about the fuel cost that eats into it. The cluster this article anchors covers both exposures, freight and fuel, because a complete voyage hedge usually needs both.

The instrument for the fuel side is the bunker swap: a cash-settled hedge on marine-fuel price, settled against a published bunker price assessment rather than a freight index. The structure mirrors an FFA. Two parties agree a fuel price for a future period and a tonnage, and at settlement they exchange the difference between the agreed price and the realized average bunker assessment, times the tonnage. A shipowner who knows it will lift several thousand tonnes of fuel over a coming period, and who fears the price rising, buys a bunker swap to lock the cost. If the price rises, the swap pays the gap, offsetting the higher physical bunker bill; if it falls, the swap costs the gap, but the cheaper fuel covers it. The fuel cost is fixed regardless.

Owners and charterers hedge fuel separately from freight because they are separate risks driven by separate markets. Freight responds to ship supply, cargo demand, and trade-route shifts; bunker prices respond to crude, refining margins, and the sulphur regulations that split the fuel pool into high-sulphur, very-low-sulphur, and marine-gasoil grades. A freight rally and a fuel spike do not have to coincide, and a hedger who covered only freight could still be sunk by fuel, or the reverse. Running the two hedges separately lets a desk size each to its own exposure.

The charter-party counterpart of a fuel hedge is the bunker adjustment clause, which passes fuel-price movements between owner and charterer contractually rather than through a financial swap. A liner BAF or a timecharter bunker-adjustment clause recalculates the freight or hire when the fuel price moves away from an agreed base, so the party bearing the fuel cost is compensated when the price shifts. The bunker adjustment factor calculator computes that recalculation from the base price, the current price, and the fuel intensity per unit of cargo:

A bunker swap and a bunker-adjustment clause attack the same fuel-price risk from different directions. The clause is a contractual reallocation between the two parties to the charter; the swap is a financial hedge with a third party in the derivatives market. A charterer who has agreed a fixed freight with no BAF clause carries the full fuel risk and may hedge it financially; one who has a BAF clause has already passed much of that risk to the counterparty. The full treatment of the clause, its GENCON and BIMCO forms, and the regulatory surcharges layered on top sits in the bunker adjustment factor article.

The forward curve, contango, and backwardation

The set of FFA prices for successive forward periods, the current month, the next quarter, the calendar years out, is the freight forward curve. It is the market’s collective view of where freight will be, and it is one of the most-watched outputs of the whole freight-derivatives complex, because it prices the future that physical decisions are made against. The Baltic Exchange publishes forward assessments built from this curve, giving the market a daily view of the term structure for each basket.

The curve has a shape, and the shape has names borrowed from commodity markets. When forward prices sit above the spot level, the curve is in contango: the market expects freight to rise, or is pricing a premium to carry the position forward. When forward prices sit below spot, the curve is in backwardation: the market expects freight to fall, or spot is bid up by a near-term tightness that is not expected to last. A steeply backwardated Capesize curve, for instance, says the market sees today’s firm rates fading, which is a direct input to an owner’s spot-versus-period decision.

That decision is the most common practical use of the curve. A spot fixture earns today’s rate on one voyage; a period charter fixes the ship for months or years at an agreed daily hire. An owner weighs the period rate on offer against where the forward curve values spot earnings over the same horizon. If the period rate sits above the forward strip, fixing period locks in a premium to what the market expects spot to deliver; if below, staying spot and rolling keeps the expected upside. The curve makes that comparison concrete, and it is built from the same FFA prices that hedge the position. The period side itself, hire, redelivery, and off-hire, is covered in the time charter party article.

Options on FFAs

Beyond the outright forward, the freight market trades options on FFAs. A freight option gives the holder the right, not the obligation, to a freight position at a strike level, in exchange for a premium paid up front. Like the underlying FFAs, listed freight options are Asian-style: they settle against the average of the index over the period, not a single closing print, so the payoff is computed on the same monthly mean that settles the forward. The FFABA publishes a standard freight options contract for the OTC market, and exchanges list options alongside their futures; EEX, for example, added Baltic Supramax and Capesize month options in its November 2024 expansion.

The appeal of an option over a forward is asymmetry. An owner who sells an outright FFA to hedge gives up the upside, as the worked example showed: fix at 20,000 and the ship earns 20,000 whether spot goes to 14,000 or 26,000. An owner who instead buys a put-style freight option (the right to sell freight at a strike) keeps the downside protection but retains the upside if the market rallies, paying for that asymmetry with the premium. Options let a hedger shape the payoff rather than simply locking a level, which is why they sit alongside outright FFAs in a sophisticated freight-risk book. The trade-off is the premium, a real cost paid whether or not the option is ever exercised.

Who uses FFAs and why

Three groups populate the market, and each is there for a different reason. The first is the natural hedgers: owners and charterers with real freight exposure who use FFAs to fix an outcome ahead of a physical fixture, exactly as the worked examples showed. For them the FFA is risk management, and the paper position is meant to offset a physical one, not to stand alone.

The second is the commercial users one step removed from the ship: commodity traders, miners, steel mills, oil majors, and grain houses who buy or sell cargo on delivered terms and carry a freight assumption inside that price. A trader who has sold iron ore delivered to China at a fixed price has taken a freight exposure whether or not it owns a ship, and buying FFAs fixes that freight cost into the deal. These users hedge freight as an input cost the way a manufacturer hedges a raw material.

The third is the financial participants: banks, hedge funds, and proprietary trading desks who take freight views with no intention of touching a cargo. Their role is liquidity. A natural hedger needs someone on the other side of every trade, and the physical market does not always supply a counterparty who happens to want the opposite freight exposure at the same time. Financial players fill that gap, taking the other side and warehousing the risk, which tightens spreads and lets hedgers transact when they need to. The market needs all three groups; a market of only hedgers all wanting the same direction at the same time would not clear.

Limitations

An FFA hedges the index, not the ship. The single most common error is treating a freight hedge as a guarantee that the ship will earn the strike, when in fact the hedge offsets the index and the ship earns its own TCE. Basis risk, the gap between the basket average and the specific vessel’s outcome, is structural and cannot be hedged away within the standard contracts. A hedger who needs an exact offset on an unusual route may find no listed contract close enough, and a bilateral FFA tailored to that route reintroduces the counterparty risk that clearing removed.

The cleared market’s daily margining is a liability as well as a protection. A hedger whose paper position moves against them must fund variation margin in cash immediately, even though the offsetting physical gain may not be realized for months. A correctly placed hedge can therefore create a real, near-term cash-flow strain that has bankrupted otherwise solvent positions during sharp moves. Margin financing is part of the true cost of a cleared freight hedge, and it does not appear in the headline FFA level.

The market and contract details stated here move. Basket route counts and weightings are revised by the index providers; clearing houses enter and leave freight, as the transfers and exits described above show; FFABA and exchange contract specifications are updated. The clearing-house list, the basket compositions, and the settlement conventions in this article reflect the structure as published by the Baltic Exchange and the named exchanges, and any contract should be confirmed against the live specification for the relevant venue and year before it is relied on. This article states no contract volumes, no historical price levels, and no clearing-house market shares, because those figures vary by source and date and are not stable enough to assert as fact.

Finally, an FFA is a financial contract with all that implies. It is marked to market, it can be closed before expiry at a gain or loss, and it carries no obligation to provide or take a vessel. It is not a freight booking and does not secure cargo space or tonnage. An owner who has sold an FFA still has to find a physical cargo for the ship; the FFA only fixes the freight economics, not the employment.

See also

• Baltic Dry Index and freight indices: the route codes, panel mechanics, and basket definitions that settle every FFA.
• Bunker adjustment factor: the charter-party clause that reallocates fuel-price movement between owner and charterer.
• Time charter party: hire, redelivery, and off-hire, the period side of the spot-versus-period decision the forward curve informs.
• FFA settlement calculator: computes the cash profit or loss on a single FFA position from strike, settlement average, days, and lots.
• Bunker adjustment factor calculator: recalculates freight or hire when the bunker price moves away from the agreed base.
• Time charter equivalent calculator: converts a specific fixture into the dollar-per-day unit the dry FFA baskets are quoted in.