Forward Freight Agreement is an agreement between two parties which sets an agreed future price for transport. Which option best describes its purpose?

• A. An agreement to fix a future freight price.
• B. A loan agreement for ship financing.
• C. A cargo insurance contract.
• D. A bill of lading for transport.

Answer: (A)

Forward Freight Agreement is a financial instrument used to hedge freight-rate exposure. It’s an over-the-counter derivative where two parties agree on a price for freight for a defined route and time in the future. The main purpose is to lock in a future freight cost or revenue, protecting against volatility in freight rates. Settlement is typically cash-based rather than requiring physical movement of goods, so no actual transport or cargo changes hands under the contract. This makes it different from a loan used for financing, a cargo insurance contract, or a bill of lading, which are about funding, risk transfer for loss, or the document proving shipment, respectively. So the best description is that it fixes a future freight price to hedge against rate fluctuations.