Financial Risk Assessment, Part I.2 (Derivatives) · 2015. 12. 28. · IMAREX Routes Sector Route...

NATIONAL TECHNICAL UNIVERSITY OF ATHENS

School of of Naval Architecture and Marine Engineering

Financial Risk Assessment, Part I.2

(Derivatives)

Scope

Περιοχή Θαλασσιών Μεταφορών, Σχολή Ναυπηγών Μηχανολόγων Μηχανικών ΕΜΠ 2

• Summary of stock exchange derivatives

• In particular some basic information on shipping derivatives

”It is far better to predict without certainty, than never to have predicted at all.”

Ηenri Poincare

Features of contemporary

economic Environment


•Volatile interest rates

•Changes in currency exchange rates

•Fluctuations in commodity prices

•Intense competition

•Competition among financial

institutions

•Globalisation of trade

Financial Risk

Management Techniques

"Financial securities whose price is derived from the actual

value of the assets that underlie, whether they are

financial or physical"

Derivatives

Εργαστήριο Θαλασσιών Μεταφορών, Σχολή Ναυπηγών Μηχανολόγων Μηχανικών ΕΜΠ 4

Definition:

• An economic agreement between two parties

(contractors), exchange of assets in the future

• They are an asset in themselves

• Aimed at effective management of asset accounting

• Contribute positively to the stability and development of

the market

Spot: The physical (real) market in which transactions are settled

immediately

Assets: Any asset (physical or financial) which is traded in the Spot

market and is substituted by derivatives in the derivatives market

Short position

Short or negative position taken by the trader who agrees to sell a

commodity (physical or financial)

Positive position (Long position)

Long or positively received by the market maker who agrees to buy a

commodity (physical or financial)

Nomenclature



• Seeds and Fruits

• Shares

• Livestock and Meat

• Interest Rates

• Wood, yarn

• food contracts

• Foreign exchange

• Precious and Industrial Metals

• Indices

• Energy Products

EXAMPLES OF UNDERLYING ASSETS

Uses and users of derivatives


Uses

• RiskReduction (Hedging)

• Speculation

• Arbitrage

• Cost reduction

• Input / Output from the market

• performance Enhancement

• Price discovery

Users

•Banks

•Investment companies

•Insurance companies

•Investors

•Various companies

Main types of derivatives


Forward Agreements Future Contracts

• Options

• Swaps

• Others

(Hedging)

Uses


Asset value protection

Open counter derivative market position than in physical market

•Main principle •Main principle

Buy low, sell how

Directional bets for value fluctuations

• Scope • Scope

• Users • Users

Participants of Physical Market

All investors

Speculation


Derivative Instruments Term Base

Contracts between two parties that require a specific act at a later

date

Trading mode : Out or In Regulated Exchanges

• Forwards • Futures

Counterparties:

Buying and selling property in

• agreed future time

• default value

Futures vs. Forwards


• They are subject to trading on trading hours of stock exchanges

• Standard (contract size, duration, delivery)

• Safety Margin

• Daily settlement: Gains / Losses credited daily

Futures Forwards

• OTC Products

• Traded as with all conditions

• Identities of counterparties are important

• Final payment on the due date


Example reflecting differences, if instead of

forwards, both companies sign Futures

• Standard - Non-optimal risk coverage

• Standard delivery dates

• daily Settlement

• Can terminate the contract whenever they wish before the end

• guaranteed

• Warranty for Fulfillment of Contracts

• Settlement

• Completion of deliveries

Marking to Market

Margin call management

clearing house - role

Future Contracts


Marking to Market

Gains or losses are settled on a

daily basis

Clearing

At the closing date of

Contract (Final Settlement)

or earlier

• Derivatives traded on the stock exchanges

• The transactions are performed by the Clearing House

(Paper-Brokers)

Options


• Call option

• Put option

It is a contract that gives the holder the right but not the obligation to

buy or sell an asset at a predetermined price at a certain time

period

The other party has the obligation to honor the contract

•European Type

•American Type


Swap

• OTC contract

• They can be considered a series of forward contracts

• Interest Rate Swap

• FOREX Swap

Is an agreement between two parties to exchange payment obligations

eg interest for a specified period and a specific notional capital

Other Derivatives

•Floor – Cap

•Options

Shipping derivatives


• Volatile freight rate prices (70% change in 20 days)

• large capital at stake

• Seasonality

• shipping cycle effect

• Extrinsic factors (military events, new deposits of oil, etc.)

• Changes in interest rates and exchange rates

• Changes in ships asset values

Characteristics of the Shipping Market -

Financial risk Sources

A favorable environment

for the development of

derivatives


The shipping derivatives are a financial product that is traded based

on a future date index value linked on the bulk and tanker freight rates.

Indicators: Baltic Exchange & Platts

They do not include physical delivery

They do not refer to real-life ships

•1985 BIFFEX

•1992 FFAs

Main Users of

Shipping

Derivatives

•Shipping companies

in general

•Companies trading

oil & seeds

•Banks and other

financial institutions

Definition

Types of Shipping Derivatives


•Forward Freight Agreements (FFAs)

•Contracts determine the price of the fare for a specific amount of

load (or vessel type) for a route (or a combination of routes) of the

main routes of the tanker & bulk carriers

•Freight Futures

•In organized exchanges: NYMEX, IMAREX

•E.g. IMAREX

•Directly to the online market through brokers in Oslo and

Singapore

•Through independent brokers shipping derivatives:

•Clarkson's, Simpson Spence & Young, Freight Investor Services

Types of Shipping Derivatives (continued)


•Hybrid FFAs

•OTC agreements

•Cleared by LCH.Clearnet

•Freight Options

•Available in individual routes of Stock Baltic Exchange in baskets and

the FFA linked to them

•Monthly, quarterly, annual

•They use indicators of the Baltic Exchange

•Option to buy or sell

•Example: Shipowner (sales contract) agrees to sell his ship at a

certain date in the future at the predetermined price

The contract shipping derivatives

should consist of:


•The route

•The price of futures / forwards

•In month contract

•The duration of the contract

•The quantity

•Settlement terms

•Clearance (if applicable)

•A contract of FFABA (Forward Freight Agreement Brokers

Association)

•or a custom ISDA (International Swap Derivatives Association)

The main trading exchanges for

shipping derivatives are:


• The IMAREX from spring 2000 is engaged in the trading and clearing of futures Futures on the Baltic Exchange indices.

• NYMEX since the May 2005 negotiates and clears it and Futures contracts.

• The LCH since September 2005 clears FFA which negotiated OTC by brokers and so creates hybrid FFA.

IMAREX

•Norwegian company

•Open since May 2000

•Collaborates with the NOS (Norwegian Futures & Options Clearinghouse)

Routes of IMAREX


Forward Freight Agreements


•Traded by ΙΜΑREX

•Cleared by NOS and others

(ΝΟS, LCH, ΝΥΜΕΧ)

BCI BDTI

BDI BTI

BPI BHI BSI

P2A Panamax T/C Skaw Gibraltar – Far East 74000

IMAREX

Routes Sector Route Description Cargo Size

C4 Capesize Richards Bay – Rotterdam 150000

C7 Capesize Bolivar – Rotterdam 150000

P3A Panamax T/C S.Korea – Japan Pacific 74000

Panel B: Listed Basket of T/C Dry-Bulk Futures

CS4TC Capesize T/C Average n/a

PM4TC Panamax T/C Average n/a

HM6TC Handymax T/C Average n/a

BCTI BITR

Baltic

Indices

Units: $ / day

Duration of contracts:

Annual / Quarterly / Monthly

Routes Dry Cargo

Units: World Scale (WS)

Duration of contracts:

Annual / Quarterly / Monthly

Routes Liquid Cargo

Performed by the IMAREX platform of NOS

Clearing


NOS enters into the transaction as the CCP offering:

• Reliability

• Balance

• Discreteness

ΑΓΟΡΑΣΤΗΣ ΠΩΛΗΤΗΣΑΝΤΙΣΥΜΒΑΛΛΟΜΕΝΟΥ

ΡΙΣΚΟ

N O S

Value of Freight Future contract :

Π = R - I

R: Price Spot ($/day)

I : Price Future ($/day)

Π > 0 : Profit from buying futures

Π < 0 : Profit from selling futuresΑ = |Π|

(Norwegian Futures and Options Clearing House)

R refers to settlement

day

Financial Risk Assessment, Part I.2 (Derivatives) · 2015. 12. 28. · IMAREX Routes Sector Route...

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Transcript of Financial Risk Assessment, Part I.2 (Derivatives) · 2015. 12. 28. · IMAREX Routes Sector Route...