Contrast Of Optimal Hedge Ratio Calculation Models Of FFA

Being a capital intensive, cyclical, and lagging industry, shipping industry has been having to seek for methods to lower the risk of freight volatility. As a result, FFA came to reality. After the severe crisis in2008, global economy has been seriously damaged and so has the shipping industry. The huge change in freight brought about large amount of economic loss to shipping companies. But this has cause revolution in the FFA development as clearing house, electronic trading screen has been used in the FFA trades. FFA trades have been taken into a new ear from old-fashioned trades into the professional clearing house mode. This gives a big opportunity to the shipping companies to take effective hedging strategies.Under this background, this paper utilizes the BDI index and FFA trading price data to contrast some models in hedging ratio calculation and test their performance. The static models are OLS model, VECM model and VAR model. Besides, dynamic models have been tested, including VECM-GARCH and MRS model. These models have been the representative models in calculating hedge ratio.In order to better observe the performance of these models, this paper has separate the data into in-sample period and out-of-sample period. A conclusion has been achieved that the best model is MRS model in both period. In addition, some more detailed analysis and discussion has been done to better test the MRS model.