5. Major Risk Components
5
Credit Risk
Defined as the risk associated with the default on a clients loan obligation before maturity
of an agreement
Operational Risk
Defined as the risk associated with the potential loss due to operational failures through
inadequate systems, management failure and fraud
Market Risk
Defined as the risk that reduces the valuation of a company’s position based on changes in
financial prices or rates
November 2013
6. Credit Risk
•
•
•
•
•
6
Use Noble’s credit team to check counter-parties.
Defaults by Korea Line, Deiulemar, Bottiglieri, Sanko, Daiichi and now Panocean.
Vessels being arrested – delayed arrival of cargo in volatile markets.
Non-performance of shipments.
Reputational damage.
November 2013
7. Operational Risk
•
•
•
•
•
•
7
Fast turnaround in ports.
Weather routing.
Port Captaincy services – stowage, draft surveys, etc.
Web based vessel monitoring system.
Efficient cash-flow management and finalization of accounts.
Dedicated team of experienced Master Mariners at charterers service.
November 2013
8. Market Risk
•
•
•
•
•
•
8
Risk is embedded in any forward contract
Market fluctuations.
Future markets are becoming tricky to forecast.
Valuation of forward contacts fluctuate with market changes.
Can be detrimental to company’s profit.
Market risk can be managed by hedging.
November 2013
12. Breakdown of Voyage Rates: 2001 vs. 2013
Tubarao - Far East: 2001
OTHERS
10%
OTHERS
11%
BUNKERS
34%
Tubarao - Far East: 2013
HIRE
30%
HIRE
55%
BUNKERS
60%
November 2013
12
15. World Steel Production – up to 2002…
15
900
Million tones
850
800
750
700
650
1988
1990
1992
1994
1996
1998
2000
2002
November 2013
16. Millions
World Steel Production - Present
16
Tonnes
1,600
1,400
1,200
1,000
800
600
400
200
0
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
November 2013
17. World Coal & Ore Trade – up to 2002…
Coal imports-Total
17
Ore imports-Total
400
350
250
200
150
100
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
0
1989
50
1988
Million tones
300
November 2013
18. World Coal & Ore Trade - Present
Million Tonnes
Iron Ore
Coking Coal
18
Steam Coal
1,200
1,000
800
600
400
200
0
November 2013
19. Iron Ore Exports/Imports – up to 2002…
Australian iron ore exports
19
Japanese iron ore imports
160
140
100
80
60
40
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
0
1989
20
1988
Million tonnes
120
November 2013
20. Total World Seaborne Iron Ore - Present
Million Tonnes
1,200
1,000
800
600
400
200
0
November 2013
20
28. What are Freight Derivatives
•
•
•
•
•
28
A Future is an agreement to buy or sell a standard quantity of a specified good for delivery
at a fixed future date at a price agreed today.
Forwards or swaps are principal to principal contracts, where one counterparty takes the
view that the price of a product, at an agreed time, will be higher than the agreed level.
While the other party contracts to differ. In time, the final settlement price provides the
answer.
Freight derivatives provide a means of hedging exposure to freight market risk through the
trading of specified time charter and voyage rates for forward positions.
Freight derivatives are primarily used by shipowners and operators, oil companies, trading
companies, and grain houses as tools for managing freight rate risk. Recently, with
commodities standing at the forefront of international economics, the large financial
trading houses, including banks and hedge funds, have entered the market.
Settlement is effected against a relevant route assessment, usually one published by the
Baltic Exchange.
November 2013
31. FFAs?
31
Forward Freight Agreements (FFAs) are the most common form of freight derivatives
traded.
Forward Freight Agreements (FFAs) are primarily transacted on a cleared basis and will
normally be based on the terms and conditions of the FFABA standard contracts as
adapted by the various clearing houses.
Commissions are agreed between principal and broker. The broker, acting as intermediary
only, is not responsible for the performance of the contract.
November 2013
32. The Trading Process
32
The main terms of an agreement cover:
1. The agreed route.
2. The day, month and year of settlement.
3. Contract size.
4. The contract rate at which differences will be settled.
November 2013
33. FFA Prices
33
A nightly report is sent to clients detailing the indicative bid/offer spreads on the major
routes in each of the sectors.
Throughout the day, bids and offers are conveyed by phone, instant messenger and email
in what has become a very fast moving market.
Baltic Exchange publishes “Baltic Forward Assessments (BFA)” - an estimated mid price of
bids and offers for the dry and wet market based on submissions from brokers at 1730
(London), which the official price used for daily margining and book management
Prices reported include:
1. BFA Capesize: C3, C4, C5, C7, C8_03, C9_03, BCI T/C Average
2. BFA Panamax: P1A, P2A, P3A, BPI T/C Average
3. BFA Supramax: BSI T/C Average
4. BFA Handysize: BHSI T/C Average
November 2013
34. Trade Recap
34
Once a trade has been concluded, a telephone call (lines are customarily recorded) or
Instant message confirms the basic details of the trade and a recap is subsequently sent to
both parties.
A full contract is subsequently sent to both parties for signature.
November 2013
35. Cleared Contracts
35
Cleared contracts are margined on a daily basis through the designated clearinghouses
and margins are based on a close-of-play forward assessment published by the Baltic
Exchange. At the end of each day, traders pay or receive the difference between the price of
the paper contract and the market index.
Clearing services are provided by The London Clearing House (LCH), The Norwegian
Futures and Options Clearinghouse (NOS) and the Singapore Exchange (SGX)
November 2013
38. Why is the Clearing House Taking the Risk? 38
Protected by margins
Margins are related to amount of risk
Mark to market
Problem for pure hedgers
Above all: if you can not pay the margins, you shouldn’t be trading!
November 2013
43. Dealing with a Short Position WITHOUT
Derivatives
COA with Owner (contract of afreightment)
Flexibility of source / destination / size
Counter-party risk
Long negotiation
Period ships
Ship is always at the wrong time in wrong place
Operational risk
Long negotiations
Basis risk
Take in spot tonnage
Market risk
November 2013
43
44. Dealing with a Short Position WITH
Derivatives
Agree the period
Agree volume
Agree price
Agree to counterparty / clearing house
Deal is done!!
44
No subjects
November 2013
45. Derivative Lingo
45
Backwardation - Where the price for the nearby period is higher than the further
forward periods
Contango - Where the price for the nearby period is lower than the further forward
periods.
Mark to Market - To re-value positions using current market prices to determine
profit/loss.
Support - The price buyers are likely to start buying in a falling market.
Resistance - The price sellers are likely to start selling in a rising market.
Basis risk - The differences between the paper hedge and the underlying physical.
Fibonacci - Italian mathematician who discovered his golden sequence of numbers which
can be applied to charts to determine market trends (38.2,50,61.8,100).
November 2013
46. Risks Associated with FFAs
46
Liquidity – this is the biggest problem.
Counter-party – all trades cleared.
Basis risk – we need to be aware of it (route, size, laycan, special conditions…..)
Accuracy of indices – manipulation.
November 2013
