A forward freight agreement (FFA) is a financial forward contract

Forward contract

In finance, a forward contract or simply a forward is a non-standardized contract between two parties to buy or sell an asset at a specified future time at a price agreed today. This is in contrast to a spot contract, which is an agreement to buy or sell an asset today. It costs nothing to enter a...

 that allows ship owners, charterers and speculators to hedge

Hedge (finance)

A hedge is an investment position intended to offset potential losses that may be incurred by a companion investment.A hedge can be constructed from many types of financial instruments, including stocks, exchange-traded funds, insurance, forward contracts, swaps, options, many types of...

 against the volatility of freight rates. It gives the contract owner the right to buy and sell the price of freight for future dates. FFAs are built on an index composed of a shipping route for tanker

Tanker (ship)

A tanker is a ship designed to transport liquids in bulk. Major types of tankship include the oil tanker, the chemical tanker, and the liquefied natural gas carrier.-Background:...

 or a basket of routes for dry bulk, contracts are traded ‘over the counter’

Over-the-counter (finance)

Within the derivatives markets, many products are traded through exchanges. An exchange has the benefit of facilitating liquidity and also mitigates all credit risk concerning the default of a member of the exchange. Products traded on the exchange must be well standardised to transparent trading....

 on a principal-to-principal basis and can be cleared through a clearing house

Clearing house (finance)

A clearing house is a financial institution that provides clearing and settlement services for financial and commodities derivatives and securities transactions...

.