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Can you hedge ship price risk using freight derivatives? : a study of the dry bulk market

Ameln, Haakon; Børnes, Eirik August
Master thesis
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URI
http://hdl.handle.net/11250/2560975
Date
2018
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  • Master Thesis [3258]
Abstract
This thesis investigates the possibility of reducing ship price risk in the dry bulk sector using

freight derivatives. We establish a theoretical linkage between ship prices and FFA prices

and empirically test this relationship. Based on this relationship, we construct a timeweighted

FFA portfolio whose aim is to reflect the future operational earnings of a vessel.

The static hedge ratios are calculated using the OLS model, while the dynamic hedge ratios

are generated from a dynamic conditional correlation GARCH (1,1) model. We find that the

hedging efficiency of an FFA portfolio on ship price risk is, in general, very good. However,

there are variations among vessels of different vintages and sizes: (i) the hedging efficiency

is negatively correlated with age; and (ii) the hedging efficiency is higher for the smaller

vessel sizes. We also find that the static hedge ratio outperforms the dynamic hedge ratio in

all ship categories. Thus, we conclude that an FFA portfolio can be used for ship price risk

management in the dry bulk sector. Ship owners should apply a static hedging strategy and

adjust the hedge ratio in accordance with the age and size composition of their fleets.

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