Forward Freight Agreements ("FFAs") are often in the
news, at present with Armada of Singapore being the latest major
operator to blame them for its financial woes.
FFAs are derivatives contracts. In essence, a FFA is an
agreement between two parties whereby one party will be required to
pay the other party depending on whether the market freight rate
for a type of voyage or period of time turns out to be higher or
lower than the figure specified in the contract.
Risks
Where used as a "hedge" against a physical
charterparty trade, a FFA should, in theory, reduce a party's
risk. However, FFAs are often stand-alone transactions, unrelated
to any physical charterparty trade, and are purely for the purpose
of speculating on the market. In the current market, such trades
can be, as Warren Buffet described them, "financial
weapons of mass destruction". In addition to Armada,
there have been a number of insolvencies which have been attributed
to FFAs.
