Freight Derivatives and Risk Management in Shipping

Measuring market risk in financial and freight markets

“…In shipping, freight market risk constitutes the most important portion of the total risk faced by shipowners, and a significant one for the charterers of the vessels (see Kavussanos and Visvikis 2006 for a systematic analysis of this). Efficient and timely measurement and management of freight market risks is therefore vital for firms striving to maintain a competitive advantage, by optimising their investment decisions and mitigating losses.…”

Bond spread determinants and bank loan defaults

“…The relevant literature shows that the prices of vessels and freight rates exhibit high volatility (Kavussanos (1996);(1997);), pronounced cyclicality and distinct seasonality (Kavussanos and Alizadeh, 2001), for an overview see Kavussanos and Visvikis (2006).…”

“…However, as described earlier shipping industry is a risky business and therefore the cash-flow generation ability of a shipping company may be subject to a number of factors. For example, freight rates being the main source of revenue for a shipping company, are found to exhibit excess volatility, pronounced cyclicality and distinct seasonality, for an overview see Kavussanos and Visvikis (2006). This fact results into higher probability of default (PD) for a shipping bank loan, when compared to other types of loans.…”

“…In the relevant literature, for an overview see (Kavussanos and Visvikis, 2006), shipping industry is shown to form a risky business mainly because prices of vessels and freight rates, which are the main source of revenue for shipping companies, are found to exhibit high volatility (Kavussanos, 1996), (Kavussanos, 1997), (Kavussanos, 2003), pronounced cyclicality and distinct seasonality (Kavussanos and Alizadeh, 2001). As a consequence, there is great uncertainty regarding the ability of a shipping company to generate sufficient cash-flows to cover the operating costs of vessels and servicing debt repayments due.…”

“…These cash-flows are subject to a number of risk factors and result into higher probability of default (PD) for a shipping bank loan, when compared to other types of loans such as mortgage or corporate ones, due to the risky nature of the shipping business. The latter can be mainly attributed to the fact that the freight rates, being the main source of revenue for a shipping company, are found to exhibit excess volatility, pronounced cyclicality and distinct seasonality, for an overview see (Kavussanos and Visvikis, 2006). These characteristics of the shipping industry increase exponentially the uncertainty, in relation to the ability of a shipping company to generate sufficient cash-flows, for covering both the operating costs of the vessels and servicing debt repayments due.…”