FFA is the abbreviation of Forward Freight Agreement, that is, Forward Freight Agreement. Different brokerage companies have different definitions of FFA. Although the explanation is quite different, in general, FFA is a forward freight agreement reached by buyers and sellers. The agreement stipulates the specific route, price, quantity, etc. , and both parties agree to collect or pay the freight difference between the official freight index price of Baltic Exchange and the contract price at some point in the future. In essence, it is a freight risk management tool. This method of avoiding the risk of futures options is called hedging. Hedging is the driving force of the futures market. Both agricultural products futures market and metal and energy futures market are derived from the spontaneous trading behavior of buying and selling forward contracts when the spot price fluctuates greatly in the production and operation process. Freight hedging means that freight is regarded as a commodity, and shipowners or shippers buy insurance for the operation link through FFA market to ensure its stable operation and sustainable development. Similarly, like all futures option products, FFA is an arbitrage tool, which is exactly what those financial institutions like.

At present, hedging in FFA market can be carried out according to different chartering methods. Let's take Panama sailing route 2A (Atlantic to Far East route) as an example to illustrate how to hedge with FFA.

In May, 2003, an import enterprise signed a forward trade import contract in August on the basis of FOB, mainly using Panama-type Atlantic-Far East route (2A), but worried about the rising freight rate, the owner wanted to lock in profits in the current market. At present, the daily rent of this route in August is 18000 USD/day. The owner bought the aviation contract on August 2a.

The main contents of the contract are as follows: buyer: ABC Company, seller: BCD Company, route: 2A, contract month: August, contract days: 90 days, contract price: 65,438+08,000 USD/day, settlement cycle: the last 7 BPI index days of the contract month, contract type: FFABA, and commission: according to the contract.

Now let's assume that the freight really rose sharply in August as the owner worried, and the daily rent in August rose to $20,000/day. The principal's profit in FFA market is (20000-18000) * 60 =120000 USD. In addition to paying a small fee, this part of the proceeds was used to make up for the loss of freight increase, and the freight was successfully locked. If the owner does nothing in the market, the owner will suffer a loss of 120000 USD.

The above-mentioned clients can buy FFA call options outside the far-month contract, which is equivalent to buying insurance for freight, and can avoid risks with less investment. The above examples are only aimed at the time charter hedging of the consignor, and the hedging methods of voyage freight, including quarterly, semi-annual and annual hedging methods. On the contrary, the shipowner can also hedge the selling contract in the market, and with the gradual increase of trading volume, the electronic trading of standard contracts is also adopted in the market at present, which is easier to operate.