The Freight Market And Its Derivatives

Despite the fact that the freight market is one of the oldest markets, it found only limited attention in financial (mathematics) studies. One possible reason may be that this market is very intransparent and only active market participants such as shipowners, dockyards, and commodity traders were fully informed on market activities. With the launch of freight market derivatives, however, many other financial institutions started to actively trade on the freight market, for instance by taking positions on future global trade activities via Forward Freight Agreements and Freight Futures. This article provides an introduction to the freight market and its most commonly used financial assets.We investigate the relationship between the freight market, freight derivatives, and macro economic variables. Further, we show how these relationships can be used to better explain and predict the future price movements of freight derivatives. To achieve this, we propose to use classical statistical methods, such as Vector Auto Regression and Vector Error Correction Models, to incorporate the information from spot markets and related explanatory variables into the prediction process.