Hedging risks in shipping using futures contracts traded on Imarex

Abstract

This thesis has studied the hedge performance of some of Imarex’s futures contracts for freight and bunker. It starts with a presentation of the shipping market and fundamental theory regarding futures and forward contracts and hedging. This is followed by discussions and analyses surrounding sampling intervals, splicing and choice of contracts. In-sample studies show a hedge effectiveness ranging from 38.5% to 76.1% for dry-bulk, 42.6% to 45.9% for tanker and 74.3% to 91.3% for the bunker contracts. There are small or no benefits from using time-varying hedge ratios through EWMA, both through in- and out-of-sample studies for freight. The viability of Imarex’s futures contracts is discussed through seven criteria for efficient futures markets. For bunker prices, increased cross-hedge effectiveness from using oil futures is found, compared with the results of Alizadeh et al. (2004).