Baltic Exchange index changes and FFA hedging efficiency

Abstract

We investigate how changes in the composition of the underlying Baltic index affect the hedging efficiency of Forward Freight Agreements (FFAs) on composite regional routes. We evaluate the hedging efficiency using minimum variance hedge ratios and naïve hedge ratios, both within and across sub-periods between 2006 and 2018, and assess whether index changes have a statistically significant impact using bootstrapping techniques and bias-corrected confidence intervals. Our findings suggest that the trend of adding more routes, reducing the weights of constituent routes, does not reduce hedging efficiency. We suggest that the co-integration between individual routes, and between spot rates and FFA prices, make Baltic Exchange index changes largely irrelevant with regard to hedging efficiency.