The effectiveness of freight derivatives in managing a ship-operators' systematic and unsystematic risks
As with any business venture, the shipping market is fraught with financial decisions and the risks associated with these decisions. The freight market is highly volatile and is the biggest business risk a shipping entity faces on their day-to-day operations, especially in the tanker market which...
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| Format: | Final Year Project |
| Language: | English |
| Published: |
2010
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| Subjects: | |
| Online Access: | http://hdl.handle.net/10356/39494 |
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| Institution: | Nanyang Technological University |
| Language: | English |
| Summary: | As with any business venture, the shipping market is fraught with financial decisions and the risks
associated with these decisions. The freight market is highly volatile and is the biggest business
risk a shipping entity faces on their day-to-day operations, especially in the tanker market which
is notorious for its volatility.
This paper examines the merits of traditional hedging, COAs and Time Charters, and freight
derivatives, Forward Freight Agreements (FFA) covering one month ahead, in managing the
business risk of a ship owner. COAs are able to maximise the utilisation of vessels and Time
Charters covers both freight volatility as well as utilisation. FFAs hedges both utilisation, if the
route is liquid enough, and rates, if the forward assessments are accurate. In unbiasedness
hypothesis tests, it is shown that forward prices are unbiased estimators of future spot prices one
to two months ahead through cointegration tests. However there lies a fundamental weakness in
the forward assessments as they are based on the use of Worldscale and the forward rates are
essentially a matter of judgement by the Baltic Exchange panellists.
Therefore, this paper further proposes the use of a empirical model study, using historical data, to
derive actual values of a ship owner operating in the TD3 route in the tanker route under the
conditions of spot voyages, COAs, Time Charters and FFAs covering one month. Considerations
for the model to reflect real world situations are discussed. Through this model, the effectiveness
of traditional hedging methods and paper hedging can be compared. |
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