Shipping Derivatives and Risk Management by A. Alizadeh, N. Nomikos

By A. Alizadeh, N. Nomikos

A entire e-book on delivery derivatives and possibility administration which covers the theoretical and functional facets of monetary hazard in transport. The booklet presents a radical evaluation of the perform of threat administration in delivery with using theoretical examples and real-life purposes.

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Example text

Organised trading in commodity futures markets dates back to the mid-1860s with the opening of the Chicago Board of Trade. The market at the time was designed to assist farmers who wanted to lock in advance a fixed price for their harvest. Market participants are confronted with price risk which arises mainly from supply and demand imbalances in the market. Derivatives markets provide a way in which these risks may be transferred to other individuals who are willing to bear them. The activity of trading futures contracts with the objective of reducing or controlling future spot-price risk is called hedging.

Chapter 9 demonstrates ‘Value-at-Risk’ (VaR) applications for freight markets. VaR is a tool used by traders for monitoring their risk exposure. We present a variety of VaR methodologies for FFA portfolios as well as different approaches used to test the validity of these models, such as back-testing techniques and stresstesting. In addition, we also show how to calculate the VaR for options positions, as well as how to decompose the risk factors for a large portfolio using Principal Component Analysis.

Shipping companies may also be exposed to currency risk if, for instance, they need to convert freight income, denominated in US dollars, to another currency; or in cases when they borrow in a currency other than US dollars and then use US dollar-denominated freight income to pay off of the debt. Asset-price risk Asset-price risk arises from fluctuations in the price of the assets of the company. For a shipping company, the major asset is of course the value of its ships. Volatility of ship prices is an important factor for shipowners, not only because it affects the balance sheet value of the company, but also because a reduction in the value of a ship may affect the creditworthiness of a shipowner and its ability to service debt obligations, because ships are used as collateral in ship-finance transactions.

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