Optimal speed and hedging strategies for tramp shipping operators in volatile freight markets

Abstract

The maritime shipping industry faces significant uncertainties due to the volatility of freight rates, directly impacting business operations. This paper examines the relationship between freight rate uncertainties, hedging policies, and shipping speeds using a novel stochastic optimization framework that integrates practical hedging strategies with operational speed decisions. Unlike traditional models that assume Geometric Brownian Motion (GBM) for price dynamics, our model employs an exponential Ornstein-Uhlenbeck (OU) process to capture the mean-reverting nature of freight rates, providing a more realistic representation of market behavior. Additionally, the model is compatible with Forward Freight Agreement (FFA) hedging practices and allows for partial hedging, aligning closely with realworld risk management strategies. By employing a mean-variance utility function, this research offers a toolkit for risk-averse shipping operators to incorporate risk tolerance into the speed and hedging decision-making process. Our analysis reveals that the ability to hedge future profits significantly influences current speed choices, uncovering novel insights such as the asymmetric nature of the optimal policy for laden and ballast legs and the sensitivity of the optimal hedge ratio to various risk parameters. We also establish a closed-form relationship between hedging ratios and speed through a newly developed theorem, offering practical guidance for operators. Experimental results demonstrate the model’s applicability and effectiveness when tested against real-life data, highlighting its potential to enhance both economic and operational decision-making in maritime shipping.

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Identifiers

ORCID for Patrick Beullens: orcid.org/0000-0001-6156-3550

ORCID for Edilson F. Arruda: orcid.org/0000-0002-9835-352X

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