Analyzing Inter-Volatility Structure to Determine Optimum Hedging Ratio for the Ship Fuel

Background and Theoretical Foundations: Considering the existed uncertainty in fuel prices, a good risk management strategy is vital for the shipping companies as the other transport companies which are exposed to the mentioned fluctuations. In this regards, this article is aimed to calculate the optimum hedging ratio for the ship fuel in terms of minimum risk. Methodology: To account for the non-constant structure of return VAR-CCC model is applied. After the estimation, the spillover and conditional structure of the variances can be analyzed. These spillovers will be important in the risk calculation of any optional basket consisting two mentioned energy carriers. In the next step, Optimization process is performed by using the Lagrangian multiplier technique. The data are obtained from Bloomberg daily closing price of energy carriers for the spanning 10 years which started from January 2010 and ends to February 2019. Findings: Results suggested that almost all of parameters were significant at 5% and was in line with the previous findings. Conclusion: The risk of ship fuel price fluctuations would be minimize if they hedge 34% of their Ship fuel with holding crude oil future contract.