Shipping Risk Management

Academic Year: 2018 – 2019

Coursework Assignment

Answers should not exceed 5 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. Mention clearly and explicitly any assumptions made in solving the problems.

Question 3: Bunker Swaps

B) It is 4th June 2018, you are working for a liner shipping company and your 12,500 TEU ship takes 5000mt of 380cst bunker every month in Singapore. Currently you are about to negotiate the price to hedge your bunker exposure for the next 12 months (July 2018 to June 2019). The following forward curve for Singapore 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.

Singapore Fuel Oil 380 cst (Platts) Futures Quotes on 4 June 2018

Maturity Forward Rate Maturity Forward Rate

Jul-19 360.634 Apr-20 301.56

Aug-19 352.786 May-20 300.045

Sep-19 343.356 Jun-20 298.835

Oct-19 333.609 Jul-20 297.25

Nov-19 323.908 Aug-20 295.665

Dec-19 315.548 Sep-20 296.162

Jan-20 309.2 Oct-20 296.658

Feb-20 305.575 Nov-20 297.155

Mar-20 302.95 Dec-20 299.814

[10 marks]

Question 4: Risk Analysis and Value at Risk

Given the Baltic Assessments for 2 quarters ahead FFAs for Average 4TCs of Capesize and Panamax (4TC_C+2Q and 4TC_P+2Q) from 4 Jan 2016 to 5 April 2019 in Excel worksheet “BFA CSZ & PMX”,

a) Estimate the Rolling Volatility (annualised standard deviation) of the series using a 61 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 =0.94.

variance

c) Estimate and plot the 1%-5day VaR for the two FFA prices from 1st Jan 2019 to 5 April 2019, using the Exponentially Weighted Average Volatility, and 250 days Historical Simulation.

d) Estimate the 1%-10day VaR for a portfolio of long 1 Cape and short 2 Panamax 4TC+2Q contracts from 1st Jan 2019 to 5 April 2019.

covariance

[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 $28m.

2- The second project involves a 3 year loan for the purchase of a 10 year old Suezmax tanker whose current market value is $35m.

Both projects are set to operate on a one-ship-one-company basis and the companies would like to borrow as much as possible to the full price of the vessel. However, your bank has a strict policy of taking the vessel as collateral and only approving loans with a maximum default probability of 15%, in order to reduce its credit risk exposure. It is also known that both borrowers have good business and credit history; therefore, according to the assigned credit rating of borrowers, default may occur if value of the asset falls 5% below the amount borrowed.

a) Assuming that the volatility of the second price for 5-year old MR tanker is 25%, the volatility of the second price for 10-year old Suezmax tanker is 30%, the risk free rate is 3%, determine the maximum amount of funds that you are permitted to provide to each shipping company for the purchase of these vessels.

b) What would be the yield on each of these asset-backed loans and their risk neutral recovery rates?

c) What would be each loan amount, yield on the loan if it was sold in the market, and recovery rate for each project, if the bank increases the acceptable level of probability of default for this loan to 20%?

d) Discuss what other alternatives the bank has to reduce its credit risk exposure to this deal.

e) Optional: build a GBM model for the evolution of ship prices and find the probability of default at the end of year 3, using MC simulation.

[20 marks]