A forward freight agreement (FFA) is a financial contract that allows individuals and companies to lock in future prices for shipping commodities, such as oil or grain. This means that the parties involved can agree to trade at a set price, on a specific date, in the future, regardless of any fluctuations in the market price of the commodity.

FFAs were originally established in the shipping industry to manage the risk of volatile freight rates. They are similar to futures contracts, which are used to hedge against price changes in commodities such as gold, oil, and grains. However, FFAs are used specifically for freight rates.

There are two types of FFAs: physical-settlement and cash-settlement. Physical-settlement FFAs are contracts that require the delivery of a commodity at a set price on a specific date in the future. Cash-settlement FFAs, on the other hand, are contracts that settle in cash based on the difference between the contract price and the market rate at the time of expiration.

FFAs are traded on exchanges, such as the London International Financial Futures and Options Exchange (LIFFE) and the New York Mercantile Exchange (NYMEX), and are settled through electronic trading platforms. They are typically used by shipping companies, investors, and traders looking to hedge their exposure to fluctuations in freight rates or to speculate on changes in the market.

FFAs provide several benefits to participants in the shipping industry. They allow shippers to lock in future revenue, which can help with financial planning and forecasting. They also enable shippers to manage risk by protecting against sudden increases or decreases in freight rates.

In conclusion, a forward freight agreement is a financial contract that enables individuals and companies to manage risk by locking in future prices for shipping commodities. FFAs are traded on exchanges and settled through electronic trading platforms. They provide several benefits to participants in the shipping industry and are an important tool for managing market risk.