I'm just looking for a pointer in the right direction on freight options....Specifically options on tanker (wet-freight) forward freight agreements (FFAs)I've got a background in nice, well behaved, financial options where modified B-S is good enough in most situations but now I'm taking a look at these FFA options. Given the huge volatility and 'gapiness' of the underlying can anybody give me an idea of suitable models and if there is any off-the-shelf software that would do the job of pricing. They are still plain vanilla options, it's just the underlying that bothers me.Ta

As you said, the underlying is a problem. How are you going to hedge these options if you don't own a ship?

why bother with trying to model the underlying? Its such a waste of time, your trader isnt probably going to hedge it according to black scholes or your model anyways... If you want to model it, look at the distribution of the underlying. It goes back years for BIFFEX. then us black scholes with a skew which u determine to hedge and manage them.

XKE - sgelb's right about what your trader is likely to do. I would add that it's difficult to model FFAs without looking at the complex it sits in - in your case crude and don't forget the bunker market. It seems to me that if you're insistent on modelling the underlying you're going to have to look at the hybrid models that combine tanker market fundamentals with the usual quantitative approach to FFAs.Good luck.

When I looked at freight options a couple years ago, I found the guys at Mallory Jones Lynch Flynn & Assoc to be a good source for elementary info on pricing and modeling...

Thanks to you all for the feedback. Napier, delta hedging isn't an issue as these are options on FFAs (freight rate forwards) and the FFA market is getting a lot more liquid. The real issues are in modelling how the FFA market behaves and from what I can see it is going to be complicated.... complicated means inefficient ... inefficient means big profits for the wise. Looks like a better bet than trying to squeeze tenths of basis points out of efficient financial markets, what do you guys think?

You will have to take a lot of one way flows and big positions though. (its like that in illiquid markets) which will give u a good idea of what the actual hegder/speculator position profiles are.The nice thing about efficient markets, is that if you want to get out of something u dont like, its pretty easy. if you try it in a illiquid market, you might move the skew or the ivol dramatically.. (then u really learn about the stop-loss distribution!!)

Ah yes.... the most expensive thing to map.... the stop-loss distribution!!!

Hi... it's not my field but I've been asked recently if I could help with some basic spreadsheet for pricing options on freight. I wonder if the market has changed since the last posting, if there have been innovations, and if there are any references on internet on trade types, and the state of modelling at present...thanks

My two ringits :Most of the time your counterpart risk is 10 times bigger than the one you would get from your model.Last time I looked at returns they looked normally distributed with usual skew/fat tails phenomenons.The fret market prices ffa options with standard black model, maybe wrongly. Most By the way impossible to physically hedge ffa considering :1. ffa are route averages - ie your vessel cannot be afloat at the same time in different part of the worl2. you cannot short physicalIf you are interested in data :http://www.balticexchange.com/

Hello Boys and Girls,I've just started looking into this too.I agree, a bit of empirical analysis should give you reasonable option pricing via BS and vol smiles.But I'm not intersted in options (yet).I'm thinking about risk managing books of the underlying, so the fat tails are of concern to me.If there were a liquid options market, I could get an implied distribution. But there isn't.So is there a formal/justifiable/well used tweak to the normal distribution to build in kurtosis?-- OR --Is there a well understood distribution that looks like a highly kurtotic normal dist that I could try to fit?Thanks everyone...

Say, what vendors provide software for FFA and other shipping stuff?I would like to sit down with a software package on this an take it for a test drive.Thanks

Hi all,I'm an FX guy starting to working on technical trading strategies in the dry freight market. I'm trying to build a continuous futures contract to backtest some momentum models that have shown promise in these wide swinging markets but the steep curve inversions distort the series since rolling to the next contract generates a big move in the series that didn't really happen. Does anybody have experience or references for getting these kinds of highly volatile futures contracts in shape for technical studies? thanks in advance.