Applied financial risk management for the shipping industry using IMAREX derivatives

Abstract

Risk Management in shipping has taken a great leap with the introduction of IMAREX, trading in cleared freight futures contracts. This thesis evaluates the derivatives introduced by IMAREX as financial instruments for risk management in the volatile industry of international shipping. The main focus is on evaluating the IMAREX Freight Futures, assessing its observed performance, and providing guidelines for optimal usage. I introduce relevant measures of hedge effectiveness, and the hedging performance of the products are evaluated according to these. The thesis furthermore describes the products in detail, and raises issues and present recommendations for effective risk management using the IMAREX derivatives from the eyes of prospective users. In this respect, section five will contain the essence of the analysis, the latter part of which will illustrate by examples a lot of the issues that could arise in an actual hedging scenario. The IMAREX Freight Options are evaluated from a more theoretical angle, where we will introduce pricing models for these options.