Investigation into the optimal freight hedging strategy with concentration on Suezmax tankers

• Main Author: Goh, Carson Kai Sheng.
• Other Authors: School of Civil and Environmental Engineering
• Format: Final Year Project
• Language: English
• Published: 2013
• Subjects: DRNTU::Engineering::Maritime studies
• Online Access: http://hdl.handle.net/10356/53935
• Institution: Nanyang Technological University

This objective of this report is to investigate the effectiveness of traditional freight hedging strategies (Time-Charter) in optimising the portfolio management of a fleet of 10 Suezmaxes and balancing portfolio risk and return at the same time. The paper commences by examining the risks in shipping and some of the risk management techniques and their effectiveness, before embarking to prove that time-charter hedging is an effective traditional freight hedging tool to protect against the volatility of spot charter freight rates and the uncertainty of the shipping market. The scope of this project is modelled after Markowitz’s Portfolio Selection Theory as a risk management tool, forming 3,003 possible portfolios for analysis in the process. Using raw freight data and ship prices from Clarkson’s CRS as well as Moore Stephens’ OpCosts data, a DCF (Discounted Cash Flow) and risk-return (Coefficient of Variation) analysis were done to determine the viability of these portfolios of 10 Suezmaxes from the period of 2000 – 2011. Lastly, a WACC sensitivity analysis is conducted to prove that shipowners will need to subscribe to various freight hedging strategies, due to the underlying difference in one shipowner’s WACC from another. Overall, the findings were conclusive in proving the hypotheses and they can potentially help owners of Suezmax portfolios in managing their shipping portfolios and accompanying risks. It may also serve as a stepping stone for further academic research in route-specific freight hedging studies or qualitative research into the effectiveness of real-life freight hedging strategies that some shipowners deploy.