BUNKERING RISK MANAGEMENT METHODS & COMPARISON

INTRODUCTION & DEFINITION The act or process of supplying a ship with fuel. Offshore Bunkering is the terminology used in the shipping industry to describe:- The selling of fuel, from specialized vessels (ships) designed for that particular task, Transferring fuel from one ship to another i.e. ship to ship transfer of fuel. The bunkering business supplies offshore deliveries of food and freshwater . This presentation will focus on how to evade the risk from fluctuation of price by many type of method such long hedge and short hedge, swap and etc.

SWAP It referring to the scenario where both buyer and seller pay each other the difference between an agreed fixed price and an average floating (or market) price in the future. If the floating or market price goes over the fixed price, seller pays buyer and vice versa. No fee is involved.

Long hedge and Short hedge CLASSIFICATION OF HEDGING Long hedge and Short hedge DEFINITIONS

LONG HEDGE Hedging strategy used by ship owners to lock in the price of a bunkering service to be purchased some time in the future. Also known as input hedge. The long hedge involves taking up a long futures position. A situation where an ship owner has to take a long position in futures contracts in order to hedge against future price volatility.

SHORT HEDGE Hedging strategy used by ship bunkers to lock in the price of a bunkering service some time in the future. Also known as output hedge. The short hedge involves taking up a short futures position . The "short" portion of the term refers to the act of shorting a security, that hedges against potential losses in an investment that is held long.

DIFFERENCE BETWEEN SHORT AND LONG HEDGE SHORT HEDGE Known as long the basis Ship owners who are buying the bunkering service later in the market. Protect themselves from price increases(Users). Benefits from the basis becoming more negative. Occurred prior the occurrence of fixed rate agreement between buyer and seller Eg. MISC negotiate to purchase the fuel for x volume at a certain price Known as short the basis Bunkers who provide the bunker services later in the market. Protect themselves against declining prices(Producers). Benefits from the basis becoming more positive. Occurred prior the occurance of fixed rate agreement between buyer and seller Eg. Caltex negotiate to sell the fuel for x volume at a certain price 

PROBLEMS IN MANAGING LONG OR SHORT HEDGES. Difficulties of estimating and hedging the risks Price can increase without limit. The hedge fund must successfully predict which stocks will perform better to gain money

SWAP

PARTICIPATION SWAP An exotic swap which allows one of the counterparties to participate in favourable movements in the underlying rate/price, while giving that counterparty a means to place a cap on borrowing cost. Differently stated,  this swap is usually used to hedge floating rate exposure while allowing the hedger to retain some gains from a favourable move in rates/prices. In a participating swap, there is a participating cap on part of the notional principal modifying the swap's floating rate payments. Last year you decided to fix the cost of your bunker purchase in the US East Coast for the following two months by buying a NYH 3% HSFO FOB Barges participation at 50% for 5,000 MT per month. BP sold you the participation at an agreed price of $255/MT.

CASE STUDY In Month 1, the index price averages to $270/MT ($15/MT above the participation price), BP will pay you $15/MT x 5,000 MT = $75,000. In Month 2, the monthly average index price is equal to $245/MT ($10/MT below the participation price). You pay BP 50% of $10/MT x 5,000 MT = $25,000.

PARTICIPATION SWAP ADVANTAGES DISADVANTAGES Protection against rising market No upfront premium Flexibility in physical supply Some participation in a falling market Some opportunity cost if market falls Premium in some cases

Definition of differential swap A swap in which the two payments are tied to two currencies in two different interest rate indexes, but in which the payments are exchanged in one base currency. For example, a rate differential swap might have payments denominated in U.S. dollars, but could have one set tied to the Japanese LIBOR (JPY) and another to the U.S. LIBOR (USD). The Japanese LIBOR payments will still be made in dollars. *London Interbank Offered Rate (LIBOR)

Definition of extendable swap An exchange of cash flows between two counterparties, one of whom pays interest at a fixed rate and one of whom pays interest at a floating rate, in which the fixed-rate payer has the right to lengthen the term of the arrangement. The fixed-rate payer might want to exercise its right to extend the swap if interest rates were rising because it would profit from continuing to pay a fixed, below-market rate of interest and receiving an increasing market rate of interest from the floating rate. The additional feature of an extendable swap makes it more expensive. That is, the fixed rate payer will pay a higher fixed interest rate and possibly an extension fee. The opposite of an extendable swap is a cancellable swap, which gives one counterparty the right to terminate the agreement early.

Flow of extendable swap initial cross currency swap requirements Negotiable and enter extendable cross currency swap make payment expiration of current period YES conditions met terminate swap

COMPARISON BETWEEN DIFFERENTIAL AND EXTENDABLE SWAP DIFFERENTIAL SWAP EXTENDABLE SWAP agree to exchange the difference between two floating prices It is a swap that has an option to lengthen the terms of the original swap Both gain profit The swap allows the holder to take advantage of current rates and extend the maturity of the swap payments in one base currency Additional feature to extend the expiration date

Double Up Swap & Variable Volume Swap

DOUBLE UP SWAP VARIABLE VOLUME SWAP Double up swap is one of the method that is use in bunkering. When profit is expected The buyer or seller will double the volume ,that is why we call double up swap. But ,when the situataion will against him,buyer or seller will turn the doubled volume to initial volume Variable volume swap is similar to double up swap, but. volume based on which the contract is settled is not known and can be variable within a range at the buyer’s (or the seller’s) option The volume will change cause of any profit expected any loss expected.

Conclusion As we know the fluctuation of price in bunkering can affect our profit and loss. So we have to overcome our problem by doing the hedge and swap . Even the risk not been avoided fully. At least by doing this method our loss been reduce and we still can survive. By doing this method our company does not affected aggressively. Hedging with supplier ( scope is smaller, the profit and loss does not in a large scale, only tied with our supplier ) the safe way. Hedging with market ( scope is more bigger, we can see the fluctuation of price very clearly and our profit and loss in large scale)