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Student number: SML S17099 Specialization: Shipping Management and Logistics (SML)

TYPE OF ASSIGNMENT: Individual Assignment Class of 2017 Term 1 Subject: SHM 101 Shipping Management – A triptych in international finance: Shipping Investment – Case Study.

Number of credits: 6 EC Date: 19 June 2017 Given by: Professor Ilias D. VISVIKIS Professor Pothis M. PANAYIDES

Word count: 3200 (Excluded table of contents, list of figures, list of abbreviations, reference list, annexes and figures description.)


Table of Contents List of Abbreviations ................................................................................................................. 3 List of Figures ............................................................................................................................ 4 List of Tables ............................................................................................................................. 4 1. 2.

Introduction – Risk Management Overview. ..................................................................... 7 Risk Management Report – Initial Considerations............................................................. 8 2.1. Investors Perspective. ............................................................................................................. 9 2.1.1. Vessel Value Risk. ........................................................................................................ 10 2.1.2. Interest Rate Risk .......................................................................................................... 11 2.1.3. Foreign Exchange Risk. ................................................................................................ 12 2.1.4. Freight Rate Risk. ......................................................................................................... 14 2.2. Industrial Group Perspective................................................................................................. 16 2.2.1. Bunker Price Risk. ........................................................................................................ 17 2.2.2. Commodity Price Risk. ................................................................................................. 19 2.2.3. Foreign Exchange Rate. ................................................................................................ 20 2.3. Bank Perspective. .................................................................................................................. 21 2.3.1. Credit Risk. ................................................................................................................... 22

3.

Recommendations. ........................................................................................................... 23

4.

Key Performance Indicators – KPIs. ................................................................................ 24

5.

Conclusion ........................................................................................................................ 27

References ................................................................................................................................ 28 Annex A – Investor Risk Management Outlook...................................................................... 30 Annex B – Industrial Group Risk Management Outlook ........................................................ 31 Annex C – Bank Risk Management Outlook .......................................................................... 32 Annex D – Bunker Cost Estimations ....................................................................................... 33

2


List of Abbreviations ABS BSC BHMI BK CCP CoE CoD DM D/E Ratio EBIT FRRi FoSVA IG INV IRR JPY KPIs MoU LA LTAV LTCG NB NPLs NPV O/L ROCE SPC !" SPFAs TC-P TBR T-Bond USD RNL VPRi

Asset-backed Security. Balance Score Card. Baltic Handymax Index. Bank. Central Counterparty. Cost of Equity. Cost of Debt. Derivative Market. Debt to Equity Ratio. Earnings Before Income and Taxes Freight Rate Risk. Forward Ship Value Agreement. Industrial Group. Investor. Internal Rate of Return. Japanese Yen Key Performance Indicators. Memorandum of Understanding. Loan Agreement. Long Term Asset Value. Long Term Cargo Contract. New Buildings. Non-Performing Loans. Net Present Value. Outstanding Loan. Return on Capital Employment Special Propose Company. Market Price. Sales & Purchase Forward Agreement. Time Charter Party. Tubarao – Brazil United State Federal Government Treasury Bond. United States Dollar. Rotterdam – Netherlands Vessel Price Risk.

3


List of Figures Figure 1 Figure 2 Figure 3 Figure 4 Figure 5

Investor Long Call Option – Freight Rate Investment Strategy Risk exposure – 380cst Bunker Prices distribution SPC. Strategy process SPC – Strategic Map SPC – Strategic Map – Objectives, Measures, Targets, Initiatives.

16 17 24 25 26

List of Tables Table 1 Table 2 Table 3 Table 4 Table 5 Table 6 Table 7 Table 8 Table 9 Table 10 Table 11

Investor Risk Management Outlook Forward Ship Value Agreement – FoSVA – Short Position Plan Vanilla Interest Rate SWAP . Currency Future Contract (Expected Cash Outflow). Option Contract/Call Option – Long Position. Investor Risk Management Outlook. Bunker Swap Contract. Coal future Contract . Currency Future Contract/Speculation Bank Risk Management Outlook . SPC Balance Score Card .

4

10 11 12 13 14 16 17 18 19 20 24


5


“For those who can effectively manage risk and volatility, shipping is still the place to be.� Greiner, R., & Simms, M. (2017)

6


1.

Introduction – Risk Management Overview. To achieve an efficient shipping management strategy is not enough to have the

fundamental knowledge in supply and demand, experience in crewing or technical management or even a strong commercial department. Shipping, it is managed in a changing macroeconomic environment and in a derived demand market where the key to obtaining financial growth lies from the responsible implementation of financial tools to cover the lack of information "uncertainty" about future market behavior. An effective risk management strategy should be balanced between the traditional and derivative financials tools to hedge the investment under severe market conditions when incomes are not enough to even to cover the break-even point. The aim of the paper is to propose a risk management strategies to hedge and use the arbitrage opportunity embedded in the Case Study, A Triptych in International Finance: Shipping Investment, following the same approach developed in the MGM103 subject. Whereas the investor (INV), the industrial group (IG) and the bank (BK) should draw up an agreement to buy five 50.000 dwt Handymax bulk carrier, with a total cost of US$100 Million, looking for supply the demand of a long-time cargo contract of primary commodities. Consistent with the risk management analysis, the paper formulates a point of view about the link between the derivate market and the Special Propose Company corporate critical success factors (CSF). Describing the core business objectives, the strategic map and the performance measures and targets, to create the balance score card of the SPC, identifying the key performance indicators (KPIs) that will allow an efficient monitoring of the project. The paper was structured identifying the hedging strategies from the three perspectives involved in section 2. Making a description in order of importance, justifying the best coverage scenario, be it traditional or financial, concluding each analysis with the most appropriate tool available in the derivate markets. In section 3, recommendations are made to integrate the position of the parties involved. Section 4 presents the balance score card (BSC) of the SPC and section 5 concludes the assignment.

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2.

Risk Management Report – Initial Considerations.

The risk management perspective for each party will be illustrated through three different main tables, Tables 1,6,10 and Annex A, B, C, with specific hierarchy, hedge option, and strategies. Although it’s imperative to realize that, during the research, blurred boundaries and overlapping concepts regardless of credit, financial and default risk terminology were founded (Kavussanos & Visvikis, 2006, p. 31). Therefore, the interest rate, financial and default risks from the Investor perspective, will be analyzed as an overall concept understood by them as the inability of the Investor to cover their financial obligations (debt/equity). Despite the fact that, the credit risk on the Industrial Group perspective could be acceptable; throughout the ship-owner perspective the asset value risk its more acceptable rather than the freight rate risk, since obtaining a long-time charter party is a priority (Herbest, Lam, & Wu, 2002). Thus, two important consideration, first, the freight rate risk management strategy will be tackled from the arbitrageurs’ position to generate additional income; second, the probability of the counterparty's will not fulfill whit the charter party should be considered as an important source the credit risk to the ship-owner. Finally, from the bank perspective, acting as Central Counterparty (CCP), through the crossselling transaction between the Investor and the Industrial Group, the use of the paper market create itself to new source of credit risk by the potentials default of counterparties using derivatives instruments (Kavussanos & Visvikis, 2006, p. 134). This risk will be covered by the bank.

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2.1.Investors Perspective. Table 1 summarizes the hierarchical organization of risks, traditional and financial hedging methods and the hedging strategy selected. Table 1 – Investor Risk Management Outlook

Source: Adapted from Kavussanos & Visvikis, 2006, 2011; Alizadeh & Nomikos 2009; Stopford, 2009; Visvikis, 2017, May 23; Herbest, Lam & Wu, 2017.

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2.1.1. Vessel Value Risk. As can be seen in the financial analysis develop in the previous subject (MGM103). The main option of INV was embedded in the sale of the asset; to generate an IRR higher than 10% or in opposite case, avoiding more losses in market depression. The traditional method of hedging price volatility is through the use of physical asset diversification; Since the INV fleet is composed of Handymax, Panamax and Capesize vessels. However, this method according to Alizadeh & Nimokos is limited because of the positive correlation between different vessel types (p. 432). Besides, the high volatility of the vessel values market combined with the slow process of Sales & Purchases (S & P), may trigger adverse effects on the liquidity of the SPC (Kavussanos & Visvikis, 2006, p. 309). The portfolio theory is also considered as a traditional method of hedging, but this concept is outside the focus of this paper, because of the lack of information on possible negative correlated asset outside the shipping industry. The risk management strategy using the derivative market will be through the Over the Counter - Froward Ship Value Agreement (OTC - FoSVA). As a contract that allows being tailor-made according to the needs of the investor, concerning agreed settlement period, maturity and type of vessel (Alizadeh & Nomikos, 2009). To show the possible scenarios following this hedging strategy is illustrated in Table 2. To secure or residual resale value risk, which could lead the incapability to exert the option to sell and cover the principal and balloon payment even without start operations. The investor agrees to sell a 24-months FoSVA contract with an expiration date in July 2002, when the vessel may be delivered from the shipyard.

Under those

circumstances, the investor hedges the exposure to fluctuations in the New Building Market value of the asset (Page 442). The underlying asset used it will be the Baltic Sell & Purchase Assessment (BSPA) Tess 52 which fix the vessel technical specifications of the project. The Short Hedge gives the Taking the worst scenario for the INV, that the asset value decreases, it sells the vessel in the physical market at a value of US$14.4 M, losing US$4.4m. However, by selling the FoSVA at the agreed price of US$20.5, offset 35% of the losses with the FoSAV market with a net result of US $ 20.5.

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Source: Adapted from (Alizadeh, & Nomikos, 2009) & (Kavussanos, & Visvikis, 2006, 2011)

2.1.2. Interest Rate Risk With a debt/equity ratio of 85%/15% in SPC1 and 80%/20% in SPC 2. The capital structure constrains financial obligations to banks and shareholders; Hence, any fluctuation in the interest rates can directly affect the capital expenditures represented in the main interest (Senior Loan) and the shareholders' coupon payment as well. Thus, the correct choice of the derivative instrument should be based on the expectations of the financial market, and thus, the correct underlying cash instrument (Kavussanos and Visvikis, 2006, p.329). The Plan Vanilla Interest Rate Swap Contract was selected to mitigated the risk. The underlying cash instrument selected was the London Inter Bank Offered Rate (LIBOR) whit predicted annual increases of 0,8%. Besides a premium of 0,5% over the spread was the fixed rate to agree in this cross-selling

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product. In Table 3 the detailed outcomes of the 5 years’ maturity contract. The positive hedging of the investor is cleared seen. With a net balance of U$4,833, extra offset of the cash flow stabilization.

Source: Adapted from Kavussanos & Visvikis, 2006, p. 356.

As a result, the hedging strategy guarantees the elimination of credit risk and the securitization of the coupon payment. The Short Position granted to sell the Option if the Interest Rate increase, to offset the losses in the money market with the profits in the future market.

2.1.3. Foreign Exchange Risk. Kavussanos & Visvikis (2006), explain that the exchange rate represents a risk to the INV cash flow, due to the uncertainty generated by the fluctuation in the value of the asset and the liabilities as a consequence of the variation, in the case study, between the Japanese Yen (JPY) against the USD (p. 322). Thus, the liquidity of the INV is represented in USD, and the payments to the Japanese shipyard must be executed in JPY, the Investor should settle his expectations according to with the macroeconomics variables, such as country growth levels, interest, and inflations rates among others, that affect the underlying cash instrument. All of these transactions entail a source of risk that must be hedged through currency futures contracts

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due to that granted long-term tailor-made contracts (page 324). The exchange rate for September 2002, when the contract with the shipyard was signed, was in USD / JPY 0.0093; The economic conditions allow to infer that the Japanese currency would continue its depreciative tendency.

Source: Adapted from Kavussanos & Visvikis, 2006, p. 329.

Therefore, the investor's leverage strategy should be focused on the short the economic value of the JPY currency. Table 4 shows the physical and future market with the two possible scenarios; Before an increase of the exchange rate the INV in exchange for losing US $ 629,047, offset by a profit of US $ 244,398. In the alternative scenario, the INV covers the risk with a profit of US $ 244,398.

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2.1.4. Freight Rate Risk. As was mentioned above, the 10y TC-P, stabilizes the cash flow of the INV, allowing a financial projection with relative security facing another type of risks such as the exposure to the charter default and so on. Hence, if the IG default, the ship owner lost the income and the opportunity of employment of the asset in the spot market; furthermore, if the spot market rate increases the chances for the INV to increase revenues decrease because the vessel is fixed until the expiration of the contract. Having said that, the INV according to Kavussanos & Visvikis, can keep the 10y-TC-P in the physical market and increase its expectations of performance trying to lock a future freight rate price in the derivate market, hedging with a "Short position" strategy in the paper market due to eventually decrease in freight rates (2011). However, due to the case study condition, the most effective tool to cover the freight rate volatility effects and the risk to lost revenues on the spot market, its apply an arbitrageurs strategy through a call option contract; following this instrument, the Investor build a synthetic profit share on the existing physical time charter (Kavussanos & Visvikis, 2011, p. 85). In Table

5,

the

scenarios

two were

simulated to understand how

this

options

contract works; when the Investor exercise the right (call option) a daily net

revenue

US3,455/day

of was

generated to the cash inflow.

Source: Adapted from Kavussanos & Visvikis, 2006, 2011; Visvikis, 2017, May 23.

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The second scenario if the spot rate decrease, the call option was not executed, and the ship owner pays only the premium settle by the clearing house. The collar stick graph (Fig.1) was built to facilitate understanding of the strategy. The market price (St) at expiration date reach US$17,410/day, the Investor applies the right at this position and get a profit in the paper market of $103.650. This value is the result of (St -X - c), and represent an increase in performance from a base rate of $9,750 per day, to $13,455. The B spot in the graph was drawn to represent the break-even point to cover the premium and start capturing the upside market profit.

Figure 1. Investor Long Call Option – Freight Rate Investment Strategy. Elaborate by David Restrepo. Note: Adapted from (Kavussanos & Visvikis, 2011, p. 85).

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2.2.Industrial Group Perspective. Kavussanos, Visvikis, & Dimitrakopoulos, considered that the perspective of the charterer, (IG) to develop risk management strategies has a different focus because its function is to ensure the transportation of its products, not to trade freight. The main function its cover the cargo transportations requirements against freight rate upturns (p. 81). Moreover, using the derivative market, the charterer gains information about what the future transport costs could be, and this allows the IG to price forward sales of goods (Kavussanos & Visvikis, 2011, p. 95). Table 6 summarizes the hierarchical organization of risks, traditional and financial hedging methods and the hedging strategy selected. Table 6 – Industrial Group Risk Management Outlook

Source: Adapted from Kavussanos & Visvikis, 2006, 2011; Alizadeh & Nomikos 2009; Stopford, 2009; Visvikis, 2017, May 23; Herbest, Lam & Wu, 2017.

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2.2.1. Bunker Price Risk. The bunker price, it’s a critical factor of the business risk as well, according to the costs structure expose by Stopford (2009), despite the fact that voyage costs depend on multiple factors, bunker costs account for 47% of the total charterer expenses (p. 233). Furthermore, due to the oil prices volatility, and bearing in mind that the voyage estimation elaborated in Annex B, granted a minimum annual fuel cost of US$ 1'553,720; the correct hedging strategy should be considered to do not incurred in default. Fortunately, this risk can be hedged by many different derivate instruments. To identify the bunker price risk exposure, an empirical analysis of historical values per metric ton of 380cst was made. Taking as reference the average in first difference of Rotterdam, Houston and Singapore bunkering values. The rate distribution was plotted at figure 2, founded the 380cst rate averaged $ 95.65 per metric ton, and a standard deviation was $ 27,016 per day; statistically, the earnings would not exceed $ 165.15/ton. This last value is constituted as the high-risk scenario for the IG.

Figure 2. Risk exposure – 380cst Bunker Prices distribution. Elaborate by David Restrepo. Note: Adapted from (Stopford, 2009, p.339).

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All things considered, the IG's coverage strategy begins with fixed 12 slots of 2,000 ton of bunker at settlement price of each average calendar month; Thus, 12 Bunker Swap Contract with maturity date May 2003, was taken as an example to demonstrate the benefits of hedging in case of an unexpected increase in 380cst fuel price in Rotterdam (Kavussanos & Visvikis, 2006, p. 298). As can be seen in Table 7, the strategy ensures a compensatory margin with gains in the paper market against the physical 380cst market by 5,1% due to the high floating bunker price, five point above the spot price in Jun 2002. Hence, the in the column (2) is observed, all the spot prices below the swap price, embody that the Industrial group paid to the bunker provider the costs minus the Swap Cost. In the opposite case, highlighted in green boxes, column (2), when the 380cst physical price increase above the expectations fixed in the swap contract in column (4), the Industrial Group receives net profit. The overall balance of the 12 months’ contract, shows a net profit of US$179,700 to the IG; However, this gain in the paper market, offset the increase on the physical market, paying US$3,340,800 instead of US$3,520,000. Given this explanation, the Bunker Swap Contract granted the bunker price volatility, at lowest trade commission, during more prolonged periods of time with losing liquidity on the money market. Table 7 – Bunker Swap Contract

Source: Adapted from Kavussanos & Visvikis, 2006, p. 298.

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2.2.2. Commodity Price Risk. It could be assumed that the risk for the charterer is also the freight rate, however, according to the case study approach, the inception of the project under the Industrial Group initiative, to acquire bulk carriers and propose a 10y-TC-P, is the traditional strategy of hedge the transport service volatility. Having said this, the primary commodities price and its fluctuation are more critical for the financial perspective. An unpredicted increase in the import price of raw materials may cause IG default, in breach of its commitments to the Investor in the agreed charter time. The thermal coal was the commodity assumed to be analyzed (raw material in the case studies). And the underlying asset is the Coal (API4) FOB (ARGUS-McCloskey) Futures (Š CME Group Inc., 2017). With each CEM Coal futures contract covering 1000 tons of coal, the IG will be required one hundred futures contracts to implement the hedge through the Chicago Mercantile Exchange (CME); 140,000mt of coal in the third quarter of 2002 (Q3). At a price of US$23.15/mt FOB and a future contract price of US$22.87/mt. The IG fixed the forward price taking a long position. The group will be guaranteed to buy 140,000mt of coal at US$22.87/mt, and the scenarios result

will

demonstrate

effectiveness of this tool.

the If the

price of carbon increases by 15% to US$26.62/mt on the maturity date, in the physical market the IG would have losses of US$347,250; With profits from the future market, a compensation

of

75.13%

is

achieved (see Table 8). In the downside scenario, the gain in the physical

market

is

used

to

compensate losses in the future market. However, the margin of effectiveness remains positive and liquidates US$28,000 Source: Adapted from Š CME Group Inc. 2017.

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2.2.3. Foreign Exchange Rate. The same considerations established section 2.1.3. For Investor's Foreign Exchange Risk must be taken into account for the industrial group risk exposure. Thus, the Cargo Handling Costs, such as canal dues, stevedores costs, cleaning holds and port charges in general, could be paid in South African Rand (ZAR), Euros (EUR) or Brazil Reals (BRL), etc. The INV risk management was conservative and base on the fundamental principle of responsible use of the paper market, (hedge positions). However, and for academic reasons only, the IG, in this case, will be speculative, to take advantage of bullish expectations of JPY against USD.

Source: Adapted from Kavussanos & Visvikis, 2006, p. 330

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2.3.Bank Perspective. It is important to mention that from the bank perspective; its main risk is the depreciation or loss of the asset capital value. The debt is represented physically by the asset, and if the asset loses their value in the market, consequently, the Bank losses the investment value as well. Therefore, all its risk mitigation products applied by the SPC (INV and IG) are focused on protecting the investment, the cash flow income, operational costs and financial performance. The ship owner and industrial group default could be associated with interest rate, asset value or foreign exchange risk, and generates the change to do not afford the debt obligations and therefore the main risk for the bank. Traditional tools to mitigate risk management are used by financial institution in shipping, for instance, the Loan Agreement contract and the Agency Theory. The first tool it is the detailed construction of different clauses like NÂş 11 and 14, where the bank stipulates certain conditions that can be presented throughout the life of the project. Such as the depreciation in the asset value, or the Investor default. To hedge this, the Bank must implement a warning signal based on Minimum Value Maintenance Clause (VMC) or asset cover ratio (ACR). The agency theory seeks to identify the different risk profiles and appetites of the parties involved in the project, helping to manage third party relationships (Clintworth, 2017, June 14).

Table 10 – Bank Risk Management Outlook

Source: Adapted from Kavussanos & Visvikis, 2006, 2011; Alizadeh & Nomikos 2009; Stopford, 2009; Visvikis, 2017, May 23; Herbest, Lam & Wu, 2017.

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2.3.1. Credit Risk. Three aspects will be considered to face the credit risk. First, the possibility of ship owner's or the industrial group default because they not fulfill their economics obligations, such as interest on principal or time charter rate. The default of any parties could be associated or leverage also by the other sources of risk, like interest rate, freight rate or foreign exchange risk, generates escalated effect. Second, the fact that the investor and the industrial group, i.e., the SPC implements strategies of financial risk management through the derivatives market, creates a new additional risk in the face of possible speculative strategies driven by ambition and greediness that lead to considerable capital losses and, consequently, default. However, the assumption mentioned above was made correspondingly to the temporal space in the case study, because the current trend to avoid this risk, is through the clearing houses or center counterparty, which in this case the bank assumes this position to exploit the cross-selling strategy. Third, the downgrade in credit worthiness by the credit agencies, causing the value of obligations it has decreed in value. (Kavussanos & Visvikis, 2006, p. 134).

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3.

Recommendations.

Despite the strategies established to mitigate risk, it is critical to understand that there are gaps that the parties must know and understand, to make decisions more adjusted to the real conditions of the derivatives market. The settlement risk, for instance, which is the difference between the average used to determine the settlement price of the underlying instrument and the average freight rate with which the asset was adjusted in the physical market. Besides, the basis risk, which refers to the mismatch between the Forward contract and the exposure in the physical market. (Alizadeh & Nomikos, 2009, p. 159). Choose the correct derivate product not always depend about the risk exposure, the contract should be liquid enough to embody some information about futures spot rates in the real market, the ship-owners and the Industrial Group should analyze the co-integration among the physical market and the underlying instruments, and convergence of spot towards forwarding rates, rather than vice versa. Spot and forward freight rates are facts co-integrated (Alizadeh, Batchelor & Visvikis, 2007, 113). Contracts with excessive tailor-made characteristics loss liquidity and thus, the futures expectations will not be achieved.

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4.

Key Performance Indicators – KPIs.

Panayides, P. M. (2017, May 29) characterize Key Performance Indicators (KPIs) as a quantitative measure linked whit a corporate initiative to achieve a benchmark. The KPIs should be integrated with the SPC´s Critical Success Factors (CSF) and using the Top-Down Approach should be cascaded from the corporate, departments and fleet level. Because the SPC it’s a joint venture between three independent parties (INV-IG-BK), the application of the KPIs should integrate the interests and objectives of each of them in one common goal, one single vision, and mission of the new organization or project (see Figure 3). To achieve this, a methodology base on the definition the strategic objectives, characterizing the strategic map, followed by performance measurement and targets will be applied. Finally, strategic initiatives shall be established, and everybody in the organization should have or know the SPC-KPIs. (Panayides, 2017, June 7). The strategy formulation was developed under three key strategic challenges: a) Long-term shareholder value b) Economy of scope c) Risk management. The last mentioned is the basis of the competitive advantage due to the securitization of the investment and flexibility to mitigate

or

eliminate

the

volatility of the company's external

environment.

Additionally, to generate a logical link between financial risk management strategies and KPIs, with the SPC project, this concept must be stipulated from the definition of Critical Success Factors, and strategic objectives of the company since its inception. Figure 3. SPC. Strategy process. Elaborate by David Restrepo. Note: Adapted from Panayides, P. M. (2017, June 8). Shipping KPIs - Strategy Maps.

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The Balance Score Card (BSC) was built, embedding the goals that connect shipping management strategies with KPIs. Highlighted in purple in Figure 4, From the top, the objectives linked to leverage the application of risk mitigation strategies throughout the company. From the highest level of the SPC, establishing the expansion of revenue opportunities, offering financial solutions to customers. The internal processes will develop the different options of risk mitigation using the inputs of human resources and information technologies.

Figure 4. Strategic Map. Elaborate by David Restrepo. Note: Adapted from Panayides, P. M. (2017, June 7). Shipping KPIs - The Balance Score Card Management System. Lecture presented at SHM101 Shipping Management in World Maritime University, Malmรถ.

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The integral part of the BSC was designed to benchmark the strategy performance (see Table 11), for academic purpose, the attention was focus only on the objectives highlighted in purple, and its breakdown in measures targets an initiative from the risk financial management perspective. Table 11 – SPC Balance Score Card

Figure 4. Strategic Map. Elaborate by David Restrepo. Note: Adapted from Panayides, P. M. (2017, June 8). Shipping KPIs – Strategy Maps. Lecture presented at SHM101 Shipping Management in World Maritime University, Malmö.

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5.

Conclusion

Using the derivatives market tools allows mitigating risk, as well as increasing costs that unquestionably alarm managers who do not understand their real derivatives added value for the company's strategy. Given the above, adequate exposure measurement is critical to determine the best risk mitigation tool. That is, exposure and vulnerability to risk should be directly proportional to the capital invested to cover the costs associated with trading in the future derivatives market. It's not enough to understand the derivatives products available on the money market and how the company aligned the financial strategy with the SPC Critical Success Factors and the KPIs, to manage a shipping company. The successful manager should develop a daily radar screen to understand the trends, the economic fundamentals, and then, project the risk management strategy to choose the correct products.

With the responsible balance of hedging and

arbitrageur’s opportunities, the SPC can expect the future with the relative serenity that the evaluation of theory of the future price, whether in contango or backwardation was correct and it will be hand by hand with the positive financial statements.

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References Alexandridisa, G., Sahoo, S., & Visvikis, I. D. (2016). Economic Information Transmissions between Shipping Markets: New Evidence from Freight Derivatives Markets. Transportation Research, 98, 82-104. http://dx.doi.org/10.1016/j.tre.2016.12.007 Alizadeh, A., Batchelor, R., & Visvikis, I. D. (2007). Forecasting spot and forward prices in the international freight market. International Journal of Forecasting, (23), 101-114. doi:10.1016/j.ijforecast.2006.07.004 Alizadeh, A. H., & Nomikos, N. K. (2009). Shipping Derivates and Risk Management. London: Palgrave MacMillan. doi:10 9 8 7 6 5 4 3 2 1 Clintworth, M. (2017, June 14). European Investment Bank. Lecture presented at 2 KMI-WMU Seminar in World Maritime University, Malmö. © Clarkson. (2017, April 7). Baltic freight index [Excel]. London: Clarkson Research Service Limited. © Clarkson. (2017, June 13). Exchange Rates Japan– Sep00 [Excel]. London: Clarkson Research Service Limited. © Clarkson. (2017, June 13). LIBOR Interest Rates– Nov01 [Excel]. London: Clarkson Research Service Limited. © Clarkson. (2017, May 27). Second-Hand Handymax Price – Abr86/Jun14 [Excel]. London: Clarkson Research Service Limited. © Clarkson. (2017, June 13). Supramax 52,000 dwt Tripcharter Rate, Transatlantic R / V– Jul03 [Excel]. London: Clarkson Research Service Limited. © Clarkson. (2017, June 13). 380cst bunker prices, Rotterdam– Jul/Sep02 [Excel]. London: Clarkson Research Service Limited. © CME Group Inc. (2017). Coal (API 4) fob Richards Bay (Argus/McCloskey) Short Dated Calendar Options Contract Specs. Retrieved June 16, 2017, from http://www.cmegroup.com/trading/energy/coal/coal-api-4-fob-richards-bay-argusmccloskey_contractSpecs_options.html Dai, L., Hu, H., & Zhang, D. (2015). An empirical analysis of freight rate and vessel price volatility transmission in global dry bulk shipping market. Journal of Transport and Engineering, 2(5), 353-361. Retrieved May 29, 2017, from www.elsevier .com/locate/jtte

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Giles. (2013). Sun Tzu On The Art Of War. Abingdon, Oxon: Routledge. Greiner, R., & Simms, M. (2017). Shipping Confidence Survey (Rep. No. DPS35253). London: © Moore Stephens LLP. Herbest, A., Lam, K., & Wu, J. (2017, May 25). A Triptych in international finance: Shipping investment. Reading. In Ciber, case collection (102-025-1). (2002). The case center. Kavussanos, M. G., & Visvikis, I. D. (2011). Theory and Practice of Freight Derivates. London: Incisive Media Investments. doi:978 1 906348 48 9 Kavussanos, M. G., Visvikis, I. D., & Dimitrakopoulos, D. N. (2014). Economic spillovers between related derivatives markets: The case of commodity and freight markets. Transportation Research, E(68), 79-102. http://dx.doi.org/10.1016/j.tre.2014.05.003 Panayides, P. M. (2017, June 7). Shipping KPIs - Introduction. Lecture presented at SHM101 Shipping Management in World Maritime University, Malmö. Panayides, P. M. (2017, June 7). Shipping KPIs - The Balance Score Card Management System. Lecture presented at SHM101 Shipping Management in World Maritime University, Malmö. Panayides, P. M. (2017, June 8). Shipping KPIs - Strategy Maps. Lecture presented at SHM101 Shipping Management in World Maritime University, Malmö. Stopford, M. (2009). Risk, return and shipping company economics. In Maritime Economics (3rd ed., pp. 319-342). New York, OX: Routledge. doi:978 0 415 27557 6 Visvikis, I. D. (2017, June 13). Bunker Fuel Rate, Vessel Price, Foreign Exchange and Interest Rate Risk Management. Lecture presented at SHM101 Shipping Management Lecture in World Maritime University, Malmö. Visvikis, I. D. (2017, May 23). Forward Freight Agreements and Freight Futures. Lecture presented at SHM101 Shipping Management Lecture in World Maritime University, Malmö.

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Annex A – Investor Risk Management Outlook


Annex B – Industrial Group Risk Management Outlook

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Annex C – Bank Risk Management Outlook

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Annex D – Bunker Cost Estimations

Table 1c: Based on calculations of. 51.000 dwt Handymax bulk with Main Engine Split-MAN-B&W 6S50MC and selected maximum continuous rating 8,580 kW/127 rpm. Elaborate by David Restrepo Note. Technical Data extracted from (Brodosplit. 2003).

Notes: Bunker consumption in the Tubarao - Rotterdam (RNL) and Bolivar - RNL for South America routes and Lagos - RNL and Saldanha - RNL for the Wes Africa routes were calculated. With a 2000 price of 380 bunker-Rotterdam (US$ 147.3/ton). The average distance was 5521 Nautical Miles (NM) and the annual bunker cost was US $ 1'553,720.; given the oil price volatility, the IG risk related with the cash-flow projection for this cost may cause serious damages to the financial balance

Risk Managment Strategies & KPI´s in a Maritime Case Study  

The aim of the paper is to propose a risk management strategies to hedge and use the arbitrage opportunity embedded in the Case Study, A Tri...

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