The effectiveness of freight derivatives in managing a ship-operator's systematic and unsystematic risks

• Main Author: Tan, Ivy Lay Hui.
• Other Authors: School of Civil and Environmental Engineering
• Format: Final Year Project
• Language: English
• Published: 2010
• Subjects: DRNTU::Engineering::Maritime studies::Maritime management and business
• Online Access: http://hdl.handle.net/10356/39589
• Institution: Nanyang Technological University

This research project is the study of hedging effectiveness of the Forward Freight Agreement (FFA) in a ship-operator’s risk management strategy, as opposed to the traditional methods like Time Charter (TC) and Contract of Affreightment (COA). The paper commences with a preliminary discussion on the elements of systematic & unsystematic risks, cost structure and revenue hedging mechanism within the context of a ship-operator involved in ocean transportation of crude oil. Thereafter, an exploratory approach is undertaken to build upon, and incorporate the aforementioned elements into a shipping portfolio model that would determine the expediency of risk management achieved by the prevalent hedging instruments – namely, the FFA, TC and COA. The resultant findings from this empirical model are analysed against statistical and financial parameters, to establish the comparative effectiveness of FFAs in risk diversification from a mercantile standpoint. The methodology, findings and implications are summarized in this report, which may provide the stepping stone for further studies into the commercial application of risk management, and increase the significance of academic research in the business of shipping.