Forward pricing in the shipping freight market
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Date
2015-12-11
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Japan Journal of Industrial and Applied Mathematics
Abstract
In this paper, we derive the price of the forward freight contract using spotforward
relationship framework.We base our pricing on six different stochastic models
which can capture many stylized facts of spot freight rates such as heavy-tailed logreturns,
time-varying volatility and mean reversion. Themodels are analytically tractable
which allows for pricing of forwards. We also examine the shape of forward curve
for all continuous-time forward pricing formulas and find various shapes being the
combination of fixed and stochastically dependent terms. Finally, this paper discusses
the effect of different time to delivery and the maturity effect to the forward curve
Description
Keywords
Freight market, Forward price, Levy processes, Normal inverse Gaussian distribution, Stochastic volatility, Autoregressive moving average