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Can you hedge dry bulk stock prices using forward freight agreements? : a study of risk management in the dry bulk shipping stock market

Byrkjeland, Maren Nessen; Eriksen, Tina Marie
Master thesis
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https://hdl.handle.net/11250/2645543
Utgivelsesdato
2019
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  • Master Thesis [4657]
Sammendrag
This thesis investigates if forward freight agreements (FFA) can be used to hedge stock price

risk in the dry bulk shipping sector. We establish a cointegrated relationship between FFAs and

dry bulk stock prices based on the link between freight rates and stock price returns of dry bulk

companies. Using contracts in the Capesize, Panamax and Supramax segment, we evaluate

hedge efficiency and minimum variance hedge ratios derived from the Ederington regression.

The hedge efficiency is compared across various hedge intervals, different maturities and

selected companies operating in the dry bulk shipping segment.

We discover that the investigated attributes have differing implications for the hedge

efficiency. From the comparison across hedge intervals, we find that hedge efficiency both

increases and decreases with increasing hedging horizon. Thus, our results are rather unclear,

and we cannot draw any conclusions about the implication of hedge horizon. Secondly, we

show that forward contracts with a maturity of one calendar year achieve, in general, higher

hedging efficiency than forward contracts with a maturity of one quarter. Furthermore, our

results indicate that the hedging efficiency of stock prices is partially explained by a company’s

risk profile in the physical market. Finally, we compare our findings to other studies, and find

that the hedging efficiency of FFAs on stock price risk is, in general, mediocre.

We believe that our findings are important for both private investors and investment

funds trading in the shipping stock market. Our findings provide useful insight to risk

management for equity investors in the dry bulk shipping sector.

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