Effectiveness of forward freight agreements in mitigating aframax tanker shipowners' business risks between 2006 and 2015
Lio, Yu Feng
Date of Issue2017
School of Civil and Environmental Engineering
In the shipping market, shipowners would employ vessels on Time Charters (TC) or Contract of Affreightment (COA) as forms of physical hedging tools to reduce exposure to the volatility of the freight market. With the introduction of shipping derivatives such as Forward Freight Agreement (FFA) which serves to mimic those used in commodities market, perhaps shipowners might explore alternative tools which might be effective in mitigating business risk. This paper discusses the risk which a typical Aframax shipowner faces while trading in the tanker market. The inherent risks of both TC and FFA were contrasted and sales risk was identified as the most important aspect of business risk for a shipowner to address. The quantitative statistical approach was utilized and financial models were developed to describe the cost structures and cashflow of an Aframax shipowner. Supporting data for the paper were obtained from sources such as Clarkson Intelligence Network, Baltic exchange, Bloomberg etc. The model focuses on the various ways of acquisition and time-charter out employment, which serves to profile a physical hedging performance of Aframax tankers over the period of 2006-2015. Results generated for time-charter out contracts were also compared with the paper hedging performance from volume 2 of this project. In all, the results shows that Time Charters generated higher returns and lower risk than FFA, which proves that traditional physical hedging outperforms modern shipping derivatives in terms of mitigating a shipowner’s business risk. This paper sets a framework for further developments in research on FFA as well as other hedging mechanisms.
Final Year Project (FYP)
Nanyang Technological University