Analysis On Forward Freight Agreement And Spot Freight Volatility In Shipping

Borrowing from financial market, shipping derivatives could be used to manage the risks in the shipping industry. Forward freight agreement is a kind of forward contract with freight indices as underlying commodity. FFA contracts are principal-to-principal contracts between a seller and a buyer to settle a freight or hire rate, for a specified quantity of cargo or type of vessel, for usually one, or a combination of the major trade routes. FFA contracts settle with the differences between fix price and Baltic Exchange Indices price (Platt's tanker freight index).FFA is a tool of risk management, which is popular with owners and shippers, so it is important for them to understand the relationship between FFA and spot rate.For this purpose, this paper analyze the relationship between tanker FFA and spot rate with Stochastic Volatility models, choosing three more important shipping line- TD3, TD5, TD7. The thesis is structured as follows:Firstly, it states the characters on tanker shipping market, development and looking forward; secondly, analyzes tanker forward freight market, including starting, development, participants and examples using FFA, which provides the basis for the application below. The thirdly, introduces the stochastic volatility models, and economic statement. Finally, reveals the return rate characters and persistence of the three shipping lines investigates the relationship between tanker FFA and spot rate by three kinds of stochastic volatility models.Above all, the main contribution of this paper are ( i )because of the unavailable of tanker FFA data, the paper analyzes from the volatility and differences of spot rate, and considers some economic indicators; (ii) introduces the Stochastic Volatility models into shipping economic analysis; (iii) amends the Stochastic Volatility models, adding to the dummy variable.