Dry bulk Forward Freight Agreement (FFA) explained

An FFA is a financial forward contract that allows ship owners, charterers and investors to take short or long positions against freight rate volatility. It gives the contract owner the right to buy and sell freight at future dates

The instrument

As for most future contracts, the financial settlement in done in cash at maturity against a reference price index but the contract can also be traded at any time before the maturity date in the "secondary" market between two parties.

Freight Options are also increasingly popular in the market and on similar contractual terms as FFAs but traded instead as "put" or "calls".

Benchmark and Settlement

Currently, the official benchmark for all voyage and period contracts is the Baltic Exchange which was recently acquired by the Singapore Stock Exchange.

Baltic Indices have been published since 1985 and include the following products for the dry bulk market:

  • Baltic Dry Index ("BDI")  -- Composite index featuring 40% BCI / 30% BPI / 30% BSI

  • Baltic Handysize Index ("BHSI")

  • Baltic Supramax Index ("BSI")

  • Baltic Panamax Index ("BPI")

  • Baltic Capesize Index ("BCI")

The majority of FFA trading is cleared today to reduce couter-party risk, ensure an efficient netting of cash flows for settlements, release of credit lines, and making the market more investable for non-shipping players. Active clearing houses include the CME Group, EEX Group, ICE, and SGX.


The market

As of December 2020, the global FFA market size was estimated at $30bn and is driven by 2 main types of participants:

  • Physical freight market participants who are looking to speculate on the freight market or hedge their positions in the physical market
    • Ship owners looking to either hedge the risk of lower freight market prices in the future OR increasing their potential gains in the event the freight market prices increase (gains on physical freight + their FFA position)
    • Charterers seeking to hedge their future freight costs against a future increase in prices or attempting to achieve a speculative gain on a future drop in freight prices (in addition to the economies achieved on lower freight costs in the future)
  • Financial investors who are taking mostly speculative positions by anticipation of price trends in both the underlying physical freight market and the market dynamics affecting the FFA market itself (supply/demand imbalances, price volatility and arbitrage, etc). Whilst many ship owners and charterers do take speculative positions in the FFA market, there is a growing proportion of financial players in this market that are not directly involved in the physical freight market. This includes hedge funds, commodity trading houses and other financial institutions who use FFAs as part of their macro and commodity strategies. This is mostly perceived as a positive dynamic because it generates additional flow and liquidity in the market but it is also a challenge because of an increased risk of pricing distortion through factors that are extraneous to the freight market. 


Shipfix market order data in the physical freight market is used as a predictive indicator see our blog post on the Shipfix Market Lead Time Index for more information.