Study On The Hedging Function Of FFA In Dry Bulk Shipping Market Based On Copula Model

Forward Freight Agreement (FFA) is one of the most important and effective tools to manage and hedge the volatility of freight rates in the dry bulk spot shipping market. But to some participants, it is also a speculative means to make profit. In this situation, plenty of liquid capital flowed in to shipping market since early this century, which resulted in more drastic fluctuation in the spot market. So how to use of shipping derivatives rationally becomes the current focus of the research on hedging the spot market risk. Seeking the optimal hedge ratio is an important prerequisite to hedging effectively, which is also the issue to study in this paper. Lots of previous researches have their limitation to evaluate optimal hedge ratio. One is based on minimizing the variance, while the other is to apply static Copula theory.In this background, several breakthroughs have been achieved by optimizing the Copula model in this paper. Firstly, an innovative method based on the minimum Value at Risk (VaR) is applied. Secondly, a dynamic Copula-GARCH model is used to replace static ones in this FFA hedging function study with empirical analysis. At the end of this paper, the results of the model indicate that long-term dry FFA contracts are of lower hedging effectiveness compare with short terms. In addition, Forward Freight Agreement contracts in Panamax dry bulk shipping market show more effective hedging ability than those in Capesize and Supermax markets, which could be a reference to ship owners when they making strategies in dry FFA market.