Briefly discuss what other risks are involved in using a series of forward or a swap contract to hedge your bunker exposure in this case.


Shipping Risk Management
Academic Year: 2021 – 2022
Coursework Assignment for MSc STF and ETF Students

This coursework carries 100% of the overall mark for the Shipping Risk Management unit and
should be completed by groups of two students. Students are free to choose their partners in
doing the coursework and producing the report. Any attempt to copy or replicate other
groups’ work will be considered as plagiarism and will result in the failure of both parties.
Answers should not exceed 10 pages. Therefore, answer each question briefly and precisely
without omitting relevant points. Tables containing summary of the results should be included
in the main text and data, estimation output, etc. should be relegated to appendices or on an
excel spreadsheet which can also be uploaded on Moodle. Mention clearly and explicitly any
assumptions made in solving the problems.
The deadline for uploading the coursework report on Moodle is: Monday 4th July 2022.
The aim of this coursework is to familiarize yourselves with the concepts of shipping
derivatives and risk managements. In particular, students will learn how to: execute a freight
hedging strategy in dry and wet bulk shipping operations, use freight options in risk
management, manage bunker risk in shipping operations, analyse credit risk assess default
probabilities, and finally assess and monitor risk exposure of freight derivatives using VaR.

2Question 1: Dry Market Hedging

A shipowner operates a 5-year old 180,000 mt dwt Capesize vessel. The vessel is currently, as
of early May 2017, under a period contract and she will be re-delivered to her owner between
1 – 10 January 2018 in the Far East. The owner is worried that the market may soften when
the time comes to fix the vessel in early January and thus decides to hedge the vessel’s
earnings for the entire calendar year of 2018.
Given the following FFA report from the Baltic Exchange and the freight rates from the
spreadsheets accompanying this coursework (tabs: Spot Freight Rates and BFA_BCI_5TC),
identify the FFA contracts that can be used to hedge this exposure and calculate the P&L from
the combined paper and physical cash flows for 2018. You may assume that the rate at which
the vessel is fixed in the physical market is the same as the spot Baltic assessment on that
Source: Baltic Exchange 17 May 2017
[20 marks]

3Question 2: Wet Market hedging

You are a VLCC operator and currently, on 15 May 2017, you have one of your vessels fixed
until early January 2018. You are concerned about freight rates softening in the coming
months; you decide to use FFAs on BDTI TD3 route to hedge your freight income for the next
calendar year (January to December 2018). Given the following FFA rates from the Baltic
Exchange report on May 15, 2018 and the freight rates from the spreadsheets accompanying
the coursework (TD3$ FFA Rates and Spot Freight Rates), show how FFA contracts can be used
to hedge your freight exposure in 2018 and calculate the corresponding cash flow position.
You may assume that the rate at which you fix your vessel in the physical market is the TD3
spot Baltic assessment at the date of the fixture. You may also assume the following; TD3
Voyage Duration: 45 days; 2017 TD3 Flat Rate: 15.17 $/mt; 2018 TD3 Flat Rate: 15.68 $/mt.
FFA Quotes for TD3 Route on 17 May 2017
Source: Baltic Exchange. The spot rate for TD3 is in Worldscale points. All other rates are in $/mt
[20 marks]

4Question 3: Freight Options and Bunker Swaps

A) Consider the following option quotes on 23/02/18 for BCI 5TC Options.:
Source: Clarksons – 23/2/18
1. Show, with the help of a diagram, how a shipowner and a charterer can use options to
hedge their freight income or cost for the last two quarters of 2018. Determine the
cost of the option hedge in each case. Using the data from the realised spot Baltic
assessments, determine the payoff of those option positions at the expiration of the
[5 marks]

2. Construct a collar that guarantees the freight cost for the last two quarters of 2018 for
a charterer to be between 26,000 and 13,500 $/day. Using the data from the realised
spot Baltic assessments in 2018 determine the payoff of those option positions at the
expiration of the contracts. With the benefit of hindsight, what would have been the
best strategy that the company should have followed?
[5 marks]

B) It is 20th May 2022, you are working for a liner shipping company and your 12,500 TEU ship
takes 5000mt of 380cst bunker every month in Rotterdam. Currently you are about to
negotiate the price to hedge your bunker exposure for the next 12 months (July 2022 to June
2023). The following forward curve for Rotterdam 380cst is shown on CME screen.
a) Assuming a flat interest rate term structure of 3% for each of the next 12 months,
calculate the swap rate for a 12-month fixed for floating swap.
b) Briefly discuss what other risks are involved in using a series of forward or a swap contract to hedge your bunker exposure in this case.

5Rotterdam Fuel Oil 380 cst (Platts) Futures Quotes on 20 May 2020

Maturity Forward Rate Maturity Forward Rate
Jul-22 595.153 Apr-23 577.975
Aug-22 598.225 May-23 573.6
Sep-22 599.35 Jun-23 568.725
Oct-22 597.725 Jul-23 563.725
Nov-22 594.475 Aug-23 558.475
Dec-22 591.475 Sep-23 552.6
Jan-23 588.85 Oct-23 546.225
Feb-23 585.725 Nov-23 539.225
Mar-23 581.975 Dec-23 532.85
[10 marks]

Question 4: Risk Analysis and Value at Risk
Given the Baltic Assessments for 2 quarters ahead FFAs for Average 5TCs of Capesize and 4TC
of Panamax (5TC_C+2Q and 4TC_P+2Q) from 2 Jan 2018 to 7 June 2022 in Excel worksheet
a) Estimate the Rolling Volatility (annualised standard deviation) of the series using a 62-day window.
b) Estimate the Exponentially Weighted Average Volatility (RiskMetrics approach) for the series over the same period as in part a), and plot the two volatilities, assuming l=0.94.
c) Estimate and plot the 1%-5day VaR for the two FFA prices from 8 June 2021 to 6 June
2022, using the Exponentially Weighted Average Volatility, and 250 days Historical
d) Estimate the 1%-5day VaR for a portfolio of long 1 Cape 5TC+2Q and short 2 Panamax
4TC+2Q contracts from 7 June 2021 to 6 June 2022.
[20 marks]
Question 5: Credit Risk Assessment
You are working for an investment bank’s shipping division in charge of credit assessment of
clients. You are given two projects to look at and evaluate their credit risk.
1- The first project involves a 3 year loan for the purchase of a 5 year old MR tanker
whose current market value is $30m.
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