Forward Freight Agreements: Protect Your Shipping Costs

A forward freight agreement is a derivative based on the cost of a shipment of freight in a given period. Companies that trade freight internationally know the market is subject to large fluctuations in price due to weather, political concerns and other sudden events. These companies may find themselves on the receiving end of a larger-than-expected bill once freight is delivered. By purchasing a forward freight agreement at a given strike price, if the realized price is too high, the company can execute the option on the lower price. This is a form of insurance that hedges against rises in freight costs.