Effectiveness of forward freight agreements in mitigating aframax tanker shipowners' business risks between 2006 and 2015
Date of Issue2017
School of Civil and Environmental Engineering
Shipowners are naturally subjected to the volatility of the spot freight rate which may then affect his ability to cover his costs obligation. As a result, it is necessary for shipowners to mitigate his risks by engaging in risk management tools, such as Time Charter as a physical hedge and FFA as a paper hedge. This research aims to investigate the effectiveness of FFA as a paper hedging tool in mitigating shipowner’s business risk. In the first part of this study, permutations of five (5) different asset classes from various acquisition methods are evaluated with voyage charter as the ship owner’s employment stratagem. The risks returns analysis is used to derive the performance of assets employed on voyage charters. The results of the analysis will serve as the comparison basis with those generated from hedging positions with FFA contracts. Ultimately, the findings from both unhedged and hedged positions are being evaluated in terms of returns performance and risks of the fluctuations in returns to determine the effectiveness of FFA. The findings in this experiment proves that hedging with +1CAL FFA contracts will result in lower risks in terms of the reduction in fluctuation of the returns as compared to an unhedged positions. However, the returns performance of hedged position is found to underperform all the asset classes of unhedged positions. The result in this experiment signifies that the shipowner cannot rely on FFA contracts to meet his cost obligation, but rather, it is used to minimize the volatility of freight rates. Therefore, the objective of this study is to enable comparison with other hedging tools and provide a comprehensive structure in evaluating effectiveness of other hedging tools which can be done by changing variables based on the aim of the experiment.
Final Year Project (FYP)
Nanyang Technological University