Explaining price differences between physical and derivative freight contracts

Physical time-charters (TC) and Forward Freight Agreements (FFAs) represent two hedging approaches that differ in terms of risks and physical access to transportation. The authors investigate the determinants of the time-varying TC-FFA freight rate differential in the dry bulk market. They 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 condition and default risk as well as vessel specifications and contractual terms. Finally, the TC-FFA differential is related to default risk premium and the potential convenience yield.


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  • Accession Number: 01679753
  • Record Type: Publication
  • Files: TRIS
  • Created Date: Aug 1 2018 3:09PM