Effectiveness of forward freight agreements in mitigating VLCC shipowners' business risks between 2005 and 2014
Date of Issue2016
School of Civil and Environmental Engineering
The aim of this research project is to investigate the hedging effectiveness of Freight Forward Agreements (FFA) in mitigating Very Large Crude Carriers (VLCC) shipowners’ business risks between 2005 and 2014. Volume Three of this research focuses on comparing the traditional hedging tool, time-charter, to determine if the newer FFA is a more comprehensive risk management tool. The paper started with evaluating the performance of time-charter contracts. Short-term contracts were compared with long-term to analyze if contract durations affect freight rate volatility. Findings indicate that short-term contracts provide shipowners with higher expected returns while long- term contracts are more likely to reduce risks of shipowners. Holding period returns and standard deviation are used as returns and risks measures to analyze between time-charter and FFA contracts. The findings revealed that time-charter contracts are more effective in hedging a shipowner’s business risks and performed better in yielding higher returns than FFA contracts. A risk-return analysis was also done to show that engaging in time- charter contracts involve a lower amount of risk for each percent of its expected return. A time-varying analysis was done to allow for explicit comparison at each year during 2005 to 2014. It was shown that levels and patterns of freight risks vary over time. In turn, the effectiveness of the hedging tools varies with market conditions as well and the findings suggests that risk adverse shipowners should engage in hedging tools during bearish conditions while trade in the spot market instead during bull markets.
Final Year Project (FYP)
Nanyang Technological University