Systematic approach to optimize financial performance of an investment portfolio in tanker market

Abstract

The tanker market has always been attractive for investors, especially in the past few years as the oil price climbed to record high. However, tanker market is notorious for its volatility. Therefore, investment in tanker market requires comprehensive understanding of the market and systematic investment strategy. Currently, research on investment strategy in tanker market is limited. This paper develops a systematic approach to construct investment portfolio to optimize financial performance of the investment in tanker market; in particular, to determine the optimal combinations of vessel types and freight contract types. The approach consists of three key components, namely, freight rate forecasting, portfolio valuation and risk measurement. Each component represents a major consideration in evaluating the financial performance of the investment portfolio. Freight rate forecasting involves examining two market sectors, the Suezmax and VLCC sectors. The projected freight rates serve as critical inputs for portfolio valuation process, underpinning by a typical discounted cash flow valuation model. Through linear programming, the optimal combination that gives the highest NPV is identified. In addition, the risk measurement is incorporated in to the linear programming model as a constraint to refine the optimal investment portfolio for investors.