Freight Forward Agreement

Hedging the cost of moving cargo, not the cargo

A freight forward agreement is a cash-settled contract on the cost of shipping, referenced to a published freight index and settled against the average of that index over a month. Nothing is delivered and no ship is chartered. It lets an owner fix future earnings and a charterer fix a future cost, and it is the clearest example of a derivative on a service rather than on an asset.

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What the lesson covers

What it is
How it settles
Why it’s used
Basis risk
Risks to watch

Key terms

Freight index — A daily published assessment of shipping rates, compiled from broker submissions, used as the settlement reference.
Time charter average — The average rate to hire a vessel class per day, the usual underlying for dry bulk contracts.
Settlement average — The mean of the index over the contract month, used instead of a single print so it cannot easily be moved.
Vessel class — A size category — Capesize, Panamax, Supramax — whose rates move together and define a contract.
Route basis — The gap between one ship’s actual economics and the index average the hedge references.
Voyage charter — Hiring a vessel for a specific cargo and route, priced per tonne, as opposed to per day.

Every key term, A to Z

In practice

Shipowners, commodity trading houses, mining companies and utilities all use freight forwards, most of them cleared. The market is small relative to the commodities it moves, which is why liquidity thins quickly outside the nearest contracts and the largest vessel classes.

Freight Forward Agreement

What the lesson covers

Key terms

In practice

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