Essays on derivatives and risk management on freight and commodity : an attempt to anticipate and hedge the market volatilities

• Main Author: Sahoo, Satya R.
• Published: University of Reading 2018
• Online Access: https://ethos.bl.uk/OrderDetails.do?uin=uk.bl.ethos.741119

This thesis investigates three unexplored areas in maritime freight and commodity markets; 1) the relationship between commodity and freight markets; 2) the interaction of freight options market with the freight futures and underlying freight rate markets; 3) improving the hedging performance of freight futures contracts by cross hedge technique. Details provided as follows: Firstly, information flows between commodity and shipping freight markets are essential for the participants of the international shipping industry for optimising ship chartering strategies, investment positioning and risk management. This study investigates the economic relationships between commodities corresponding shipping freight rate markets, along with both their futures contracts, through a comprehensive dataset of 65 variables analysed simultaneously through a dynamic factor model. In contrast, previous literature has only investigated the bi-variate framework which limits some of the crossmarket information. Commodity markets (especially the crude oil and other oil derivative products) lead the freight rates driving price movements. Secondly, the study fills the gap by investigating the economic spillovers of both returns and volatilities between time-charter rates, freight futures, and the un-investigated freight options in the international dry-bulk shipping industry. Empirical results indicate the existence of significant information transmission in both returns and volatilities between the three related markets, which we attribute to varying trading activity and market liquidity. The results also point out that, consistent with theory, the freight futures market informationally leads the freight rate market, though surprisingly, freight options lag both futures and physical freight rates. Lastly, the international shipping freight rates are susceptible to high market volatilities demanding diversifying and hedging the associated risks. This study develops a portfolio-based methodological framework aiming to improve freight rate risk management to create market stability. The study also offers, for the first time, evidence of the hedging performance of the recently developed container freight futures market. The approach utilises portfolios of the container, dry bulk and tanker freight futures along with corresponding portfolios of physical freight rates to improve the efficacy of risk diversification for shipping market practitioners. The results of this thesis provide not only commercial and financial risk management solutions but also offer valuable insights for economic development policymakers and regulators. The empirical findings uncover necessary implications for overall business, commercial, and hedging strategies in the shipping industry, while they can ultimately lead to a more liquid and efficient freight futures market.