Optimal Hedging Strategies in the Low‐Sulphur Bunker Fuel Landscape

ABSTRACT The IMO2020 regulation for the green transition in shipping turned the industry into using two compliant bunker fuels: very low‐sulphur fuel oil (VLSFO) and low‐sulphur marine gas oil (LSMGO). VLSFO futures contracts introduced in late 2019 and other energy‐related futures contracts indicate that the VLSFO contracts trading on the Singapore Exchange, when used in direct hedging, are the most effective. Cross‐hedging can work on rare occasions. Copula‐family models in certain locations perform better in the calculation of optimal hedge ratios in cross‐hedging situations, as in LSMGO hedging. Models that produce time‐varying and constant hedge ratios can also work well, particularly in direct‐hedging situations.