Management Review

›› 2018, Vol. 30 ›› Issue (11): 247-256.

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Financial Dynamic Hedging in Shipping Market

Lu Bo1,2, Xing Jian3, Song Dongping4   

  1. 1. International College of Dalian University, Dalian 116622;
    2. Smart Shipping and Logistics Network Technology National Local Joint Engineering Laboratory, Dalian 116622;
    3. College of Economics and Management of Dalian University, Dalian 116622;
    4. Management School, University of Liverpool, Liverpool L697 ZH
  • Received:2017-09-15 Online:2018-11-28 Published:2018-11-22

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Abstract:

The emergence of shipping financial derivatives brings a Markov character to the spot and futures prices of shipping and this makes it difficult for the existing theories or models to accurately predict the fluctuations characteristics of spot and futures prices of shipping. Compared with existing studies, the method used in this paper takes into account the unpredictability of the fluctuation characteristics of spot and futures yields of shipping. And our method overcomes the problem of misalignment of spot and futures prices yields fluctuations caused by the discontinuity of spot yields volatility and the distortion by using historical data to estimate the volatility of yields, which are generally unsolvable by the existing dynamic hedging model. That is to say, the method of calculating the time-varying beta coefficient by estimating the factor model to obtain the dynamic hedging rate is essentially a kind of rational expectation, and it is more applicable to the hedging of the shipping market. We calculate the discrete time varying hedging rate of the Capesize vessel from Australia to China, and compare it with the results of other four commonly used hedging models. We find that compared to other methods, this model can lock in the same level of risk with the lowest cost. This low cost hedges the risk of spot fluctuations with the least futures position, and also our discrete time-varying hedging ratios avoid the problem of increasing transaction fees and margin costs by frequently changing futures positions in the portfolio in continuous model.

Key words: FFA, shipping market, yield volatility, time-varying hedging