Understanding FFAs: What are FFAs and why they matter
In this series, Baltic Exchange showcases key details and information behind Forward Freight Agreements (FFAs) to help potential entrants better understand the entire FFA process and support the business development aid for FFA brokers.
The Baltic's FFA resource can be found on our website by clicking here or by clicking “FFAs” on the top taskbar. Please direct any comments or queries to Nadia Mirza, Head of Business Development at the Baltic.
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FFAs are contracts that give the owner the right to buy or sell the freight price for future settlement. An FFA is a purely cash-settled contract with no physical delivery attached. The underlying market is based on the spot freight indices produced by Baltic Exchange for each respective trade.
FFAs are traded Over the Counter (OTC), facilitated by a broker, and given up for clearing to an exchange: CME, EEX, ICE and SGX.
Typical FFA market participants include ship owners, cargo owners, ship operators, financial institutions and investment funds
FFAs are an essential tool for risk management in the shipping industry, offering strategies such as hedging, speculation, arbitrage, and cash flow security.
Hedging enables market participants to mitigate risks from price fluctuations by taking an equal and opposite position to their physical. Shipowners can sell FFAs to create a short position, while cargo owners can buy FFAs to establish a long position.
FFAs provide cash flow security, ensuring stable freight income for financing. The forward curve offers insights into freight market expectations, aiding negotiations and cost control.
What are the features of an FFA contract?
FFAs offer significant advantages over physical hedging as they are more adaptable. Contracts can span from as short as five days to multiple years, with hedge periods customisable by month, quarter, or year. It is also flexible, allowing each counterparty to exit at any time.
FFAs are financially settled and cleared through exchanges to reduce counterparty credit risk. These contracts cover various pricing metrics, including number of days, metric tons, Worldscale, or per container box.
Key parameters of an FFA contract include specific market, time period, FFA volumes, FFA price and the clearing platform.
FFA Options are derivative contracts granting the holder the right to buy or sell an underlying FFA contract at a predetermined strike price by a set date. Unlike FFAs, which bind both parties to trade, options offer a greater level of flexibility to holders.
Freight Options are exercisable only at expiry, with their value tied to the underlying FFA’s spot price. Call Options enable buyers to cap maximum freight costs, while Put Options guarantee minimum freight income for shipowners. The premium is the holder’s maximum loss and the seller’s maximum gain.
Traded via brokers and cleared through exchanges, options require deeper market understanding than FFAs, with specialised courses available for advanced learning through the Baltic Academy.
Baltic Panellists
Baltic Exchange works with experienced and competitive shipbrokers who do not invest in the markets they report and are free from conflicts of interest. These shipbrokers provide forward assessments for dry, tanker, gas and container FFAs.
Click here to access the full list of the Baltic’s FFA panellists under Forward Assessments.