Managing Risk Management

By Mike Reardon, Vice President, IMAREX

With the unprecedented collapse of dry bulk rates over the past few months, we have seen increased inquiry from those looking to maximize their risk management capabilities.  The two most common lines of questioning we have been receiving are centered on cleared trading and the use of options.  We will address both of these concepts below in the FAQ format.

What has changed in the market that has caused people to review their risk management procedures? The simple, though unfortunate, answer is that dry bulk rates have plummeted.  The extreme nature of the decline has created concern that some parties may not be able to pay what they owe.  This counterparty concern doesn’t just apply to FFAs.  It also applies to the physical market.  When ships begin to get redelivered early, or when Charterers are unable to make hire payments on time, the potential for a ripple effect begins to work its way through the business.

Other than counterparty risk, what issues are facing the industry? Because the magnitude of the losses can be quite large, people have been asking if there is a way to hedge, but without facing unlimited downside, as they could face with simple FFAs.  The use of options allows people to hedge in this manner.  The price movement of options and FFAs are of course similar – as the price of the option depends on the price of the underlying FFA – but, with options, you can limit downside.

Sounds complicated. It can be as complicated as you want to make it, or as simple as you want to make it.  Let’s start with the concept of cleared trading first.  We can then move to options.
Continue Reading

A New Perspective

We are very grateful to Imarex’s Mike Reardon for introducing us last week to his colleague from Singapore, Jeffrey Landsberg. Mr. Landsberg suffers from a keen interest in the bulk markets and unlike Mike he focuses more on the physical market. This week we publish for the first time his weekly newsletter, which we will continue to do on a regular basis. We believe that the views of both Messrs Reardon and Landsberg are extremely valuable and a worthy addition to our publication. We hope you find them as useful as we do.

Pick Your Poison

That Was The Week That Was

Marine Money’s flagship conference came to New York this week and if you were a kid you might refer to it as a three- ring circus. With the conference as the centerpiece, the week has become filled not only with the usual owner/banker meetings but formal presentations and the usual bevy of social events. The numbers are astounding with over 1,000 delegates registered this year, exceeding by far all previous years. In fact, as quickly as we printed a copy of the delegate list, we found it to be obsolete.

Continue Reading

Athenian and Viking Confab

In front of a packed crowd at the New York Helmsley, the Hellenic-American and Norwegian-American Chambers of Commerce held their 14th Annual Joint Shipping Conference under the catchy title “Are the Bulls and the Bears Right?”

The day started off with derivatives, a tough topic for early in the morning. Nevertheless, the presenters pulled it off and kept everyone interested. To start off Robert Shaw of Mystras Ventures gave a great overview and primer on freight derivatives. In particular, he emphasized their importance of derivatives for hedging but noted that freight volatility and correlation with other commodities has attracted financial players into the market, a recurrent theme.

Continue Reading