Pricing and Hedging in the Freight Futures Market

Journal of Futures Markets, Vol. 31, No. 5, 2011

36 Pages Posted: 6 Mar 2010 Last revised: 26 Apr 2012

See all articles by Marcel Prokopczuk

Marcel Prokopczuk

Leibniz Universität Hannover - Faculty of Economics and Management; University of Reading - ICMA Centre

Date Written: February 15, 2010

Abstract

In this article, we consider the pricing and hedging of single route dry bulk freight futures contracts traded on the International Maritime Exchange. Thus far, this relatively young market has received almost no academic attention. In contrast to many other commodity markets, freight services are non-storable, making a simple cost-of-carry valuation impossible. We empirically compare the pricing and hedging accuracy of a variety of continuous-time futures pricing models. Our results show that the inclusion of a second stochastic factor significantly improves the pricing and hedging accuracy. Overall, the results indicate that the Schwartz and Smith (2000) two-factor model provides the best performance.

Keywords: Freight Futures, Hedging, Shipping Derivatives, Imarex

Suggested Citation

Prokopczuk, Marcel, Pricing and Hedging in the Freight Futures Market (February 15, 2010). Journal of Futures Markets, Vol. 31, No. 5, 2011, Available at SSRN: https://ssrn.com/abstract=1565551 or http://dx.doi.org/10.2139/ssrn.1565551

Marcel Prokopczuk (Contact Author)

Leibniz Universität Hannover - Faculty of Economics and Management ( email )

Koenigsworther Platz 1
Hannover, 30167
Germany

University of Reading - ICMA Centre ( email )

Whiteknights Park
P.O. Box 242
Reading RG6 6BA
United Kingdom

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