Article ID Journal Published Year Pages File Type
1023587 Transportation Research Part E: Logistics and Transportation Review 2012 13 Pages PDF
Abstract

We focus on non-storability, a characteristic of shipping freight that leads to an enormous gap between the widely-used no-arbitrage pricing theory and shipping freight derivative markets. Our main contribution is to modify and generalize the Bessembinder and Lemmon (2002) model. Equilibrium spot and forward price formulae are derived in a shipping freight market where shipowners, charterers, and speculators are non-homogeneous. From our formulae, we also obtain the properties of the forward risk premium and an optimal hedge ratio. In addition, we use the model to quantify the risk attitude of market participants.

► Equilibrium spot and forward prices are derived in a shipping freight market model. ► Dependence of the forward risk premium on several market features is demystified. ► An optimal hedge ratio with a forward contract is offered. ► A numerical example is provided to calibrate risk attitude.

Related Topics
Social Sciences and Humanities Business, Management and Accounting Business and International Management
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