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Portfolio Management of Tanker Freight Risk

Portfolio Management of Tanker Freight Risk. Intertanko’s Rotterdam Tanker Event Monday 15 th April 2002 Jim Gretton – Global Freight Forwards. What some Owners do. Acquire ships Sell Ships

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Portfolio Management of Tanker Freight Risk

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  1. Portfolio Management of Tanker Freight Risk Intertanko’s Rotterdam Tanker Event Monday 15th April 2002 Jim Gretton – Global Freight Forwards

  2. What some Owners do • Acquire ships • Sell Ships • Fill intervening time as best as can - take period cover if cash flow dictates and a T/C is available - might do some contract business - take spot market wherever ship happens to be • For all period business, tomorrow is higher than today

  3. Alternative Trading Method – Portfolio Management • For each forward time period, assess freight longs/shorts– LONG means you benefit if rates go UP (eg Owning a ship) – SHORT means you benefit if rates go DOWN (eg having T/Chartered out) – match by period (eg Month), vessel size (eg VLCC), region (eg AG) – net off longs against shorts to determine your net position • Assess your opinion of forward markets– forecast state of global economy – forecasts of likely oil demand (eg EIA, OPEC) – market sentiment • Match your forward position with your forward opinion– are you happy? – if not, FIX IT! – can still Time Charter (out or in) or do Contracts, but also FFAs

  4. What is a Freight Forward Agreement? • Can be ‘Over-the Counter’ agreement or traded on an Exchange via a screen • ‘Contract for Differences’ (CFD) – means cash settlement • Uses a specified notional voyage • Fixes a price today for a defined future period • Position closed out against an Index or Broker assessment over the defined future period

  5. FFA Compared to Time Charter Pros • No physical performance risk • More liquid than Time Charter • With standard terms, quick to do • Flexible volumes, regions and selective timings • Keeps control of your physical assets Cons • May not get perfect match with desired voyage/timing • Can have bunker price exposure (unless hedged)

  6. TD1, 280kt AG – US Gulf TD2, 260kt AG – Singapore TD3, 250kt AG – Japan TD4, 260kt W Africa – USG TD5, 130kt W Africa – USAC TD6, 130kt cross Med TD7, 80kt, cross N.Sea TD8, 80kt, AG-Singapore TD9, 70kt, Caribs – USG TD10, 50kt, Caribs – USAC TC1, 75kt clean, AG – Japan TC2, 33kt clean, UKC – USAC TC3, 30kt clean, Caribs – USAC TC4, 30kt clean, Sing - Japan Baltic International Tanker Routes

  7. Using FFAs to Adjust the Portfolio • Identify period/region of concern • Translate exposure into tonnes/month on appropriate BITR route • Compare your opinion of forward rates with available bids/offers in the FFA market • If FFA numbers are better than your own view, trade • REVIEW REGULARLY!

  8. Systems & Controls • Need for review means that all physical freight deals must be entered in an exposure system • Must ensure all FFAs are entered promptly • Should value all paper deals on a ‘mark-to-market’ basis daily • Report on on-going counter-party exposure • Control on max outstanding at any one time

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