The Study On Price Discovery Function Of FFA Market

International dry bulk cargo transportation has been an important component of the world's shipping industry. Dry bulk cargo transport, such as grain,ore and coal, is directly related to the situation of a country's development, attracting the attention from governments. As the economic and trade developments of China, the prices of world's dry bulk transport increase; therefore, China has been a major participant of dry bulk global shipping market today. However, because the dry bulk shipping market is highly competitive, the changes of global economic situation, national trade policies, natural environment and other factors are rapid response to the tariff, resulting in intensive fluctuation of dry bulk freight transport tariff. In order to avoid the risk of tariff fluctuation, the Baltic Exchange developed the Baltic freight index futures in the mid 1980s in the last century. As the world shipping market development and international economic and trade policy changes, the Baltic freight index futures exposed more and more defects and was eventually replaced by Forward Freight Agreement by (FFA) in 2004.As new freight derivatives, FFA has similar properties to futures. Owners or charterers can trade in the opposite direction in the FFA market and the spot market to guarantee profits and minimize risks. With the increasingly popular FFA trading, more and more financial speculators enter the market, making risk premium by speculation and arbitrage and accepting the market risk, thus promoting the FFA trading liquidity. Meanwhile, because of inter-dependence between future freight transport market of FFA and the spot markets of dry bulk, the two prices have internal relations,we can predict the price of spot market through the study of FFA. The growth of the shipping companies largely depends on the discovery and effective application of these relations.Taking the four China-related dry bulk routes C3, C4, C5, C4TC for example, this thesis selects 4 kinds of prices between 2006 and 2010 (the economic crisis in late 2008 as a watershed) and uses three econometric model (LS, VAR, ECM-VAR) to analyze the price discovery function of FFA in three different temporal angles,. On the one hand, the thesis predicts the current tariffs by utilizing the future tariffs. One the other hand, the thesis uses current tariffs to derive future tariffs and compares the prediction accuracies. This study finds that (1) the prediction of future tariffs is more accurate in the LS model while the three models have similar prediction accuracies on current tariffs, which has methodological implications; (2) Preceding current tariffs should be taken as the primary consideration for price bids, while preceding future tariffs should be considered after current tariffs; (3) In the situation of severely economic fluctuations, all three forecasting methods have large errors; therefore, market participants must be extremely cautious when they trade to avoid risks as much as possible. This thesis hopes that China's shipping companies can use the most accurate prediction models to use the price discovery function of the Forward Freight Agreement under their own conditions and in market environments, and avoid market risks to obtain stable income.