What Are The Options in Risk Management?

Many new tools for holding down costs or for locking in revenues have been presented to the maritime industry in recent years. Futures, forwards, options, swaps, caps, collars, fences, and swaptions…the list goes on and on. In all of these tools, the shipping company is urged to manage the cost or revenue by entering into another transaction involving a financial instrument. In this, the first of two articles, we try to illustrate where the similarities and differences among the instruments lie.

Financial engineers, in their efforts to create products for customers, have been accused by many people in the shipping industry of going overboard in terms of their inventiveness. While there is certainly an increased awareness of some of the risk management products named above, conversations with readers of Marine Money – including some very savvy financial types – reveal that a great deal of confusion still exists about the exact nature of all these devices. The uncertainty is focused in several areas, such as what the profit/loss profiles look like for each device, and what the costs are – both explicit and implicit. Additionally, some readers were not clear on what instruments could be applied in which markets.

This is only an excerpt of What Are The Options in Risk Management?

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