Shipping Derivatives (FFA and Risk Analysis)

Shipping Derivatives (FFA and Risk Analysis)

Answers, excluding the data and computer output, should not exceed 4 pages. Therefore, answer each question briefly and precisely without omitting relevant points. Tables containing summary of the results should be included in the main text and data, estimation output, etc. should be relegated to appendices or on an excel spreadsheet. Make clear notes on any assumptions made for solving the problems

Question 1: Wet Market hedging
You are a VLCC operator and currently, on 9 September 2011, you have one your vessels fixed until early January 2012. You are concerned about freight rates softening in 2012, and thus considering the use of FFAs on BDTI TD3 route to hedge your freight income for the next calendar year. Given the following FFA rates and the freight rates from the spreadsheets accompanying the coursework, show how FFA contracts can be used to hedge your freight exposure in 2012 and calculate the corresponding cash flow position. You may assume that the rate at which you fix your vessel in the physical market is the TD3 spot Baltic assessment at the date of the fixture. You may also assume the following; TD3 Voyage Duration: 45 days; TD3 Flat Rate: 22.60 $/mt

Question 2: Risk Analysis and Value at Risk
Given the Baltic Assessments for Average 4TCs for Capesize and Panamax 1 calendar ahead (Cal+1) FFAs in Excel file “Baltic Assessments 2013-14”,
a) Estimate the Rolling Volatility (annualised standard deviation) of the series over 2014 using a six-month (126 day) window.

b) Estimate the Exponentially Weighted Average Volatility (RiskMetrics approach) for the series over the same period as in part a), and plot the two (Rolling and EWAV) volatilities, assuming ?=0.94.

c) Estimate and plot the 1%-1day VaR for each of the FFA prices over 2014, using the Exponentially Weighted Average Volatility as well as the Rolling Volatility estimates.

d) Estimate and plot the 1%-1day VaR for a portfolio of long 1 Cape and short 2 Panamax contracts over the 2014, based on EWAV.

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