Investigation into the optimal freight hedging strategy with concentration on Suezmax tankers
Tan, Ker Han.
Date of Issue2013
School of Civil and Environmental Engineering
Shipowners are subject to a myriad of risks in the inherently volatile shipping market. To stay afloat and competitive, shipowners must employ portfolio management to maximise returns while reducing risk exposure. Today a variety of hedging tools exists to aid shipowners such as physical freight hedging and freight derivatives. This report investigates the effectiveness of physical hedging techniques in optimising Suezmax portfolios and balancing portfolio risk-return. The period of 2001 – 2011 was examined and considered the impact of asset acquisition in a portfolio – by new-building, 5-year second-hand purchases or time-charter – and their deployment. The report utilised historical Suezmax market data from Clarkson Research Services and Moore-Stephens to obtain freight, costs and vessel prices. The report then proceeded to determine the various acquisition and deployment combinations which can be formed by a ten-vessel Suezmax portfolio, and then utilised historical data to determine the viability and risk-return ratio of each portfolio. The Discounted Cash Flow Model was applied to the cash flows of the portfolios to determine their economic viability, and the Coefficient of Variation determined to examine risk-return balance. An efficient portfolio frontier was plotted. It was found that the optimal portfolio choice depends on the level of the shipowner’s cost of capital, with a lower number of feasible portfolios as it increased. Additionally, at low capital cost, portfolio optimality trended towards portfolios heavily weighted in owned tonnage deployed on time-charter. This trend reversed at high costs of capital towards tonnage time-chartered in but deployed on voyage charters. Time-charters were found to effectively hedge risk at low WACC. At higher WACC a shipowner benefits from diversifying into assets with low correlation. These findings can potentially help owners of Suezmax portfolios in portfolio and risk management, and serve as a stepping stone for further academic research in freight hedging and portfolio management.
DRNTU::Engineering::Maritime studies::Maritime management and business
Final Year Project (FYP)
Nanyang Technological University