| Few will argue that these are not interesting times for the shipping industry. Freight rates have risen to unprecedented levels and have increased by almost 300 per cent over the period form 2003 to mid-2008. This increase in freight rates was followed by a corresponding drop of 95 per cent over the last quarter of 2008. Indication to freght-rate volatility, Shiping market participants have always been faced with important and difficult investment decisions because of the complex and volatile nature of the shipping industry. While volatility in ship prices and freight rates offers the opportunity for large profits, it can also lead to huge losses, which also seems to have changed the way the industry views and manages its risks. In recently years, we have also seen the emergencing, maturing and corresponding growth in the derivatives market for freight, and shipping market participants can hedge or manage their risks through shipping derivatives such as Forward freight agreement, nowdays, freight rates can be bought and sold like any other commodity.Firstly, this paper has introduced the definition of basic risk management and financial derivatives, showing how the shipping companies use the forward freight agreements (FFA) to hedge freight rates risk, and finally the paper put emphasis on certain shipping companies use FFA to hedge freight rate risk and establish an effective portfolio.Because of the characteristics of fat tail and spiked peak distribution, volatility clustering and significant ARCH factor of the daily returns, we use the GED-EGARCH VaR model.The VaR values provide a quantitative measurement to assess risk in FFA, and shipping companies can develop their own trade and hedging strategy, and thus better able to avoid risks and improve profits. Finally, this article get a conclusion from the empirical analysis, and give some advise to shipping companies and prove that the use of VaR approach to manage the risk of FFA is feasible. |
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