Effectiveness of forward freight agreements in mitigating handymax bulk ship-owners' business risks between 2006 and 2015

Shipowners are constantly exposed to several types of risks while operating in a volatile freight market. In order to reduce their risk exposure, shipowners have to employ various risk management tools. Traditional physical hedging tools, such as the Time Charters (TC), have been utilized by shipowners to hedge their earnings in the freight market. Recently, the paper hedging tool, Forward Freight Agreement (FFA), was introduced as an alternative hedging tool to help shipowners reduce their risk through the financial market. This research aims to evaluate the effectiveness of using FFA as a hedging tool to mitigate shipowners’ business risk in the Handymax Dry Bulk Market, from 2006 to 2015. This research was statistical in nature, utilizing a large amount data published by Baltic Exchange, Clarksons Shipping Intelligence and Bloomberg. Hence, this rsearch adopted a quantitative approach while conducting this research. This volume first identified the FFA contract route to be used to manage freight rate risk. The FFA contract route with the highest correlation between its forward prices and the spot prices was determined. This volume then utilized both the Ordinary Least Square (OLS) Regression model and the T-test to determine the strength and statistical significance respectively of the correlation between the forward prices and settlement prices of the respective FFA contract periods. The contract period with a correlation that is strong and statistically significant was identified to be used to manage freight rate risk. A strong and statistically significant correlation also underscores the accuracy of the forward prices in predicting the future prices. This volume found that the forward price is not predictive of the future price. The correlation between the forward price and settlement price was neither strong nor statistically significant. As such, future studies need to be conducted using more sophisticated forecasting tools to test the accuracy of forecasting future prices.Bachelor of Science (Maritime Studies