Effectiveness of forward freight agreements in mitigating aframax tanker shipowners’ business risks between 2006 and 2015

The highly fluctuating spot rates in the tanker market inherently results in high volatilities in the earnings of ship-owners. It is therefore crucial to determine whether there is a need to hedge in the tanker market by assessing if the volatile earnings can sufficiently compensate the cost obligat...

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Main Author: Halidah Abdul Nazhar
Other Authors: Soh Woei Liang
Format: Final Year Project
Language:English
Published: 2017
Subjects:
Online Access:http://hdl.handle.net/10356/71059
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Institution: Nanyang Technological University
Language: English
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spelling sg-ntu-dr.10356-710592023-03-03T17:08:55Z Effectiveness of forward freight agreements in mitigating aframax tanker shipowners’ business risks between 2006 and 2015 Halidah Abdul Nazhar Soh Woei Liang School of Civil and Environmental Engineering DRNTU::Business::Finance::Derivatives The highly fluctuating spot rates in the tanker market inherently results in high volatilities in the earnings of ship-owners. It is therefore crucial to determine whether there is a need to hedge in the tanker market by assessing if the volatile earnings can sufficiently compensate the cost obligations of ship-owners. Should these earnings not adequately compensate the cost obligations of ship-owners, the need for hedging tools is justified. The need for hedging was investigated by analysing the returns and risks of different Asset Classes at varying WACC values. Varying WACC values of 5%, 10%, 15% and 20% used to address the varying levels of risk ship-owners are exposed to. Traditionally, ship-owners employ physical hedging tools such as Time Charter (TC) to hedge their earnings in the physical market. Time charters, though secured income for the period of hire, did not allow ship-owners to operate in the spot market during the period of hire, hence ship-owners were not able to capture the rising spot rates in a bullish market. Moreover, ship-owners wanted a hedging tool that could better represent their exposure in the physical market. Hence, FFA paper hedge, was an alternative tool for ship-owners to manage their freight-rate risk. Prior to the employment of FFA, its accuracy as a hedging tool was first investigated. The accuracy of FFAs was determined by its predictive mechanism. Correlation and regression analysis was used to determine the relationship between the forward and final settle prices of each contract period. Overall, this paper seeks to quantitatively justify why ship-owners need to employ hedging tools. Additionally, prior to determining its hedge effectiveness, the accuracy of FFAs as a hedging tool was investigated. The results were conclusive, and the hypotheses were validated. Bachelor of Science (Maritime Studies) 2017-05-15T03:26:51Z 2017-05-15T03:26:51Z 2017 Final Year Project (FYP) http://hdl.handle.net/10356/71059 en Nanyang Technological University 54 p. application/pdf
institution Nanyang Technological University
building NTU Library
continent Asia
country Singapore
Singapore
content_provider NTU Library
collection DR-NTU
language English
topic DRNTU::Business::Finance::Derivatives
spellingShingle DRNTU::Business::Finance::Derivatives
Halidah Abdul Nazhar
Effectiveness of forward freight agreements in mitigating aframax tanker shipowners’ business risks between 2006 and 2015
description The highly fluctuating spot rates in the tanker market inherently results in high volatilities in the earnings of ship-owners. It is therefore crucial to determine whether there is a need to hedge in the tanker market by assessing if the volatile earnings can sufficiently compensate the cost obligations of ship-owners. Should these earnings not adequately compensate the cost obligations of ship-owners, the need for hedging tools is justified. The need for hedging was investigated by analysing the returns and risks of different Asset Classes at varying WACC values. Varying WACC values of 5%, 10%, 15% and 20% used to address the varying levels of risk ship-owners are exposed to. Traditionally, ship-owners employ physical hedging tools such as Time Charter (TC) to hedge their earnings in the physical market. Time charters, though secured income for the period of hire, did not allow ship-owners to operate in the spot market during the period of hire, hence ship-owners were not able to capture the rising spot rates in a bullish market. Moreover, ship-owners wanted a hedging tool that could better represent their exposure in the physical market. Hence, FFA paper hedge, was an alternative tool for ship-owners to manage their freight-rate risk. Prior to the employment of FFA, its accuracy as a hedging tool was first investigated. The accuracy of FFAs was determined by its predictive mechanism. Correlation and regression analysis was used to determine the relationship between the forward and final settle prices of each contract period. Overall, this paper seeks to quantitatively justify why ship-owners need to employ hedging tools. Additionally, prior to determining its hedge effectiveness, the accuracy of FFAs as a hedging tool was investigated. The results were conclusive, and the hypotheses were validated.
author2 Soh Woei Liang
author_facet Soh Woei Liang
Halidah Abdul Nazhar
format Final Year Project
author Halidah Abdul Nazhar
author_sort Halidah Abdul Nazhar
title Effectiveness of forward freight agreements in mitigating aframax tanker shipowners’ business risks between 2006 and 2015
title_short Effectiveness of forward freight agreements in mitigating aframax tanker shipowners’ business risks between 2006 and 2015
title_full Effectiveness of forward freight agreements in mitigating aframax tanker shipowners’ business risks between 2006 and 2015
title_fullStr Effectiveness of forward freight agreements in mitigating aframax tanker shipowners’ business risks between 2006 and 2015
title_full_unstemmed Effectiveness of forward freight agreements in mitigating aframax tanker shipowners’ business risks between 2006 and 2015
title_sort effectiveness of forward freight agreements in mitigating aframax tanker shipowners’ business risks between 2006 and 2015
publishDate 2017
url http://hdl.handle.net/10356/71059
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