Abstract
Bulk shipping is a globalised industry, and market prices are entirely dependent on the world’s economic climate. The industries contractual arrangements are also rather flexible making it difficult for market participants to understand the trends and fluctuations of market prices and forcing market participants to face greater uncertainty and volatility. Oil and Forward Freight Agreements (FFAs) act as suitable hedging instruments in bulk shipping markets, allowing market participants to hedge their risks in spot markets. This research predominantly applies the vector autoregressive moving-average model (VARMA) and uses variables from one year FFAs and the global oil index to analyse the relationships between the two instruments. This research believes the VARMA (1,3) is the most suitable model, because it demonstrates the existence of a stage one lag effect between Capesize FFAs and the global oil index. This model also has three error correction factors. By using VARMA (1,3) formulas, it is possible to discover the mutual effects of the relationship between the two hedge components. The research result aims to provide market participants with guidance for entering and exiting bulk shipping markets. Key words: Forward freight agreement (FFAs), oil index, vector autoregressive moving-average model (VARMA).
Highlights
Pricing in bulk shipping markets is highly uncertain because of the degree of flexibility involved
Oil and Forward Freight Agreements (FFAs) act as suitable hedging instruments in bulk shipping markets, allowing market participants to hedge their risks in spot markets
For operators and managers in the shipping industry, understanding the relationship between the variables that influence pricing in shipping markets has the potential to Abbreviations: FFAs, Forward Freight Agreements; VARMA, vector autoregressive moving-average model; BDI, Baltic Dry Index; BRS, Barry Rogliano Salles; BCI, Baltic Capesize Index; BFA, Baltic Forward Assessments; BIFFEX, Baltic International Freight Futures Exchange; BFI, Baltic Freight Index; OTC, over the counter; ARIMA, autoregressive integrated moving average; DF, Dickey-Fuller; partial autoregression (PAR), Partial Autoregression; SCAN, smallest canonical correlation analysis; Bunkerworld Index (BWI), Bunker world Index; BBP, Bunkerworld Benchmark Prices; RMSPE, root mean square percentage error
Summary
Pricing in bulk shipping markets is highly uncertain because of the degree of flexibility involved. The bulk shipping market is a globally competitive market, and as a result, its prices are significantly affected by changes in the world economic climate (Kavussanos, 1996). The contract terms define specific shipping routes, prices, quantity, and payment periods. Both contracting parties agree to collect or pay the difference between the FFA contracted price and the price based on the Baltic Dry Index (BDI) at a specified future date. FFAs include different specific shipping routes and have forward freight terms for various vessels, for example the contract specifications of the Panamax FFA index and the Capesize FFA index, which are different. Kavussanos et al, (2004) believed that FFAs have functioned as stabilizers
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