An analysis of the relationship between forward freight agreements and steel price index: An application of the vector ARMA model

Abstract

The bulk shipping market, as a global business, depends on the development of emerging industrial countries, the exploration of new mining areas, the policies of countries importing raw materials and the international economic situation. Due to market participants being able to decide independently the timing for entering or exiting the market, the type of vessel to invest in, the locations of shipping operations, and trading partners, this high level of independence and operation elasticity makes it difficult for market participants to control price volatility and trend. As such, market participants are reluctantly facing greater market uncertainty and volatility. Meanwhile, Forward Freight Agreements (FFAs) act as a very reliable hedging instrument, which enables market participants to hedge market risks by investing in FFAs. This research employs a time-series analysis, VARMA (Vector Autoregressive Moving-Average Model), as the methodology, using one year FFAs and the global steel price index as variables to analyze the coefficient between the two. This research is intended to provide market participants with a new direction for entering or exiting markets. Key words: Forward freight agreements, steel price index, VARMA.