Quantifying Freight Rate Risk using Stochastic Modelling

Sindre Sjøbakk

Student thesis: Master thesis


This thesis is devoted to management of freight rate risk in the dry bulk sector of shipping. The freight rate risk is modelled in a multivariate setting including Panamax, Supramax and Handysize vessels. Freight rates are proposed to follow a geometric Brownian motion including stochastic volatility as modelled by Heston. In order to maintain interdependency between vessel classes, a Student’s t copula is used to couple the Wiener processes of the freight rate model. The freight rate model captures the fat tails and volatility clustering of historical freight rate data as well as the historical correlation between the freight rate indices. The freight rate risk is quantified by estimating the potential Cash Flowat-Risk and Expected Shortfall. The cash flow effects of operating in the exposed spot rate market are compared to hedging by operations in the time-charter market. Three different lengths of time-charter contracts are used in the comparison; three months, six months, and one year. Simulations show that this type of hedging reduces the potential cash flow losses by 6%, 19% and 37% for these contracts, respectively.

EducationsMSc in Applied Economics and Finance, (Graduate Programme) Final Thesis
Publication date2016
Number of pages109