Hedging

Freight futures (FFAs)

Published 18 October 2026

A forward freight agreement (FFA) is a contract on a freight rate, not on a ship. Two parties agree a rate for a future month. When that month is over, the rate is compared with what the market actually paid, and one side pays the other the difference in cash. No ship is chartered and no cargo moves. An owner uses it to protect future earnings, and a charterer uses it to protect a future freight bill.

What an FFA settles against

The "market" in an FFA is a published index, almost always one assessed by the Baltic Exchange. Each working day the Baltic Exchange publishes rates for standard routes and for time charter averages. A time charter average is the mean of several routes for one ship size, for example the Capesize five-route average (5TC), the Panamax four-route average (4TC) or the Supramax ten-route average (10TC). Tanker routes are quoted as voyage rates per tonne, such as TD3C from the Middle East Gulf to China.

An FFA does not settle on one day's figure. It settles on the average of the index over the contract month. An exchange contract specification for a tanker route, for example, sets the final price as the average of the Baltic assessments for each business day of the month. Averaging stops one unusual day from deciding the payment, and it matches how a ship really earns: over a month of trading, not on one date.

The unit depends on the index. A dry bulk time charter contract is quoted in US dollars per day, and one lot is one day. A voyage route is quoted in dollars per tonne, and one lot is 1,000 tonnes.

Who takes each side

The owner sells. An owner with an open ship next quarter is exposed to falling rates. Selling an FFA fixes a rate for that period. If the market falls, the FFA pays the owner and makes up for the lower physical fixture.
The charterer buys. A charterer or a cargo owner who must move cargo next quarter is exposed to rising rates. Buying an FFA fixes the cost. If the market rises, the FFA pays the charterer and makes up for the dearer ship.
Traders and funds take a view on the market with no ship or cargo behind it. They add volume, which helps the hedgers find a counterparty.

Cleared or over the counter

An FFA is usually agreed through a broker, the same way a fixture is. In the early years the two sides then held the contract directly with each other. This is "over the counter" (OTC): if one side could not pay at settlement, the other side lost the money. That is counterparty risk.

Today most FFAs are given up for clearing. A clearing house, such as those run by CME, EEX, ICE and SGX, stands between the two parties and guarantees the payment. In return each side posts margin: cash held against losses, topped up daily as the market moves. Clearing removes counterparty risk but adds a cash cost. A company that hedges a large position must have cash ready for margin calls when the market moves against the paper, even though the physical ship will gain at the same time.

A simple hedge

An owner has a Supramax open from the start of the third quarter and expects to trade it in the spot market. The owner sells a third quarter 10TC FFA for 30 days a month at 15,000 dollars a day. These figures are made up for the example.

Owner sells Q3 Supramax 10TC at 15,000 /day, 30 days a month.
Illustrative figures only.

  Month    Index average   FFA pays owner        Ship earns
  July         13,000      (15,000-13,000) x 30   about 13,000 /day
  August       12,000      (15,000-12,000) x 30   about 12,000 /day
  Sept         17,000      (15,000-17,000) x 30   about 17,000 /day
                           owner pays here

  July    +60,000
  August  +90,000
  Sept    -60,000
  Net     +90,000 on the paper

In July and August the market was below the agreed rate, so the FFA paid the owner and topped up the weak physical earnings. In September the market rose above it, so the owner paid out, but the ship was earning more at sea. Over the quarter the owner gets close to 15,000 a day whatever the market did. That is the purpose: not to make money on the paper, but to make the result predictable.

The same arithmetic in reverse is a charterer's hedge. A charterer who buys the FFA pays when the market is low, when ships are cheap, and receives when the market is high, when ships are dear.

Why the hedge is never exact

The gap between what the FFA pays and what the physical business loses is called basis risk. It has several sources.

The route is not your route. The index is an average of standard routes. Your ship may trade a route the index does not include, or a route whose rate moves differently. A Supramax on a short Asian trade can earn far less than the ten-route average in the same month.
The ship is not the index ship. Each index assumes a standard size, speed and consumption. An older, slower or less economical ship earns a discount to the index, and that discount can change.
The dates do not line up. The FFA settles on a calendar month. A physical charter starts and ends on the dates the ship is delivered and redelivered, which rarely match the month.
The ship may not trade at all. Off-hire, a dry-docking or a long wait for cargo leaves the paper hedge running with nothing underneath it.

For this reason most hedgers cover only part of their exposure, and they choose the index closest to what their ships actually do.

What this means on a desk

A broker does not need to trade FFAs to use them. The forward curve, the FFA price for each future month and quarter, is the market's current view of where freight is going. Comparing a time charter offer with the forward curve for the same period shows whether the offer is above or below what the paper market expects. That comparison is the same one the time charter equivalent makes for a single voyage, moved forward in time.

References

ICE Futures Europe, TD28 FFA, West Coast Canada to China 80kt (Baltic) Future, contract specifications, 2026. ice.com
Breakwave Advisors, Forward Freight Agreement (FFA) and freight risk management, a powerful mix, 2022. breakwaveadvisors.com
Wikipedia, Forward freight agreement. wikipedia.org
The Baltic Exchange, Freight derivatives (FFAs).

Freight markets and the Baltic indicesThe BDI is a panel of brokers' judgement on set routes, not a price anyone paid. What it is for, and what it cannot tell you about your ship. Shipping cyclesSupply is a fleet ordered three years ago, and demand is not. That mismatch is the main reason freight rates behave the way they do. Bunker pricing and hedgingFuel is usually the largest single voyage cost, and the only one priced in a market that moves every day. Where the price comes from, and three ways to fix it. Time charter equivalentFreight per tonne cannot be compared with hire per day until you divide it by the voyage. This is the arithmetic that does it. Voyage charter vs time charterHow the two main charter types split the risk, what each side pays for, and which terms exist in only one of them.

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