Managing risk with freight futures from IMAREX : testing hedging effectiveness and the unbiasedness hypothesis

This thesis investigates the hedging effectiveness and unbiasedness hypothesis of the IMAREX PM4TC freight futures contract. First, we present theory of dry bulk shipping and risk management. Then, we study hedging effectiveness of the futures contract. This is performed by using regression models and a VAR model to calculate constant hedge ratios and a VAR-GARCH model to calculate time-varying hedge ratios. We find the hedging effectiveness to range from 29,50% to 31,78%, when hedging one of the four T/C routes underlying the futures contract. Hedging with time-varying hedge ratios is in most cases shown to be superior to hedging with a constant hedge ratio. Finally, the unbiasedness hypothesis is studied. We find that one month to maturity futures contracts give an unbiased prediction of the spot price at maturity. This implies that a hedger can trade in one month to maturity futures contracts without paying a risk premium. A rolling hedge can thus be executed efficiently. In addition, the futures price can be used to guide in decision making. Unbiasedness is also indicated for two and three months to maturity contracts, but, due to a small data sample and residual diagnostics problems, we have not drawn any conclusions. Acknowledgements We would like to thank our advisors, Associate Professor Jonas Andersson and Professor Siri Pettersen Strandenes, for their contributions and helpful comments. At Jebsens, Jermyn Chua, Magnar Ekerhovd, Frode Høyland and Michael Tysoe have been very helpful with their support and clarifying observations. Our thanks also go to Mikal Bøe and Lene Marie Refvik at IMAREX, who have been cooperative by answering questions and supplying us with freight futures data. In addition, we would like to express our appreciation to John Michalis and Janet Sykes at The Baltic Exchange, who have given us access to spot price data. Finally, we thank Kjetil Tversland for designing the front page and printing the thesis