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Explaining price differences between physical and derivative freight contracts

Roar Adland and Amir H. Alizadeh

Transportation Research Part E: Logistics and Transportation Review, 2018, vol. 118, issue C, 20-33

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 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.

Keywords: FFAs; Time-charter; Basis risk; Convenience yield; Default risk (search for similar items in EconPapers)
Date: 2018
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