Explaining price differences between physical and derivative freight contracts

Adland, R. & Alizadeh-Masoodian, A. ORCID: 0000-0003-1588-6214 (2018). Explaining price differences between physical and derivative freight contracts. Transportation Research Part E: Logistics and Transportation Review, 118, pp. 20-33. doi: 10.1016/j.tre.2018.07.002

Abstract

Physical time-charters (TC) and Forward Freight Agreements (FFAs) represent two hedging approaches that differ in terms of risks and physical access to transportation. We investigate the determinants of the time-varying TC-FFA freight rate differential in the dry bulk market. We find that TC and FFA prices are co-integrated but TC rates are generally priced higher than FFAs. The differential is explained by the level and slope of the term structure, a measure of economic ‘stress’ as well as vessel specifications and contractual terms. Finally, the TC-FFA differential is related to default risk premium and the potential convenience yield.

Publication Type:	Article
Additional Information:	© 2018 Elsevier. This manuscript version is made available under the CC-BY-NC-ND 4.0 license http://creativecommons.org/licenses/by-nc-nd/4.0/
Publisher Keywords:	FFAs, time-charter, basis risk, convenience yield, default risk.
Subjects:	H Social Sciences > HG Finance
Departments:	Bayes Business School > Finance