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Chapter 1

Freight rate -

Price charged by transportation carrier for moving an item or commodity from point A to point B. Actual amount charged varies based on weight of object being moved, type of commodity being moved, and distance travelled.

Types of risk:

Price risk - uncertainty over the magnitude (величина) of cash flows, due to possible changes in output/input prices. Mainly external type

of risk. For shipping companies is Freight rate risk - variability in the earnings of a shipping company due to changes in freight rates.Operating cost risk - volatility on the cost side (fuel costs, bunker cost). Interest rate risk ; Asset price risk - fluctuations in the price of the assets of the company (value of the ship)

Credit risk -uncertainty over whether a counter-party to a transaction will perform its financial obligations (failure of debtor to repay the loan)

Pure risk - a risk of reduction in the value of business assets due to physical damage, accidents and losses.(in shipping - collision,

accidents from oil/chemical spillage) The difference between price and pure risk is that the result from pure risk can be very large to the size of the business and may threaten the firm's viability.

Risk management process:

Risk identification -identification of loss exposures;

Risk evaluation - quantifying the exposure to each risk factor, measuring expected losses and standard deviation of losses over period of time.

Risk management - selecting instruments for identified risks' management.

Risk monitoring - monitoring performance and suitability of the risk-management methods on an ongoing basis.

Derivatives - contract for transaction whose value depends or derives from the values of underlying variables. Generally they specify terms of transaction that will take place in future.

Forward contracts - agreement made today between 2 parties, where party B has the obligation of delivering at some fixed future date a given quantity of clearly specified asset and party A has an obligation of paying at that date a fixed amount that agreed today/ price agreed at date 0 of the asset at date T and denoted F(0,T))

Future contracts - are very similar to the forward contracts. Differences are - futures are traded in organized exchange, futures are standardized whereas forward are made to suit the requirements of each party;

Swaps - agreement between 2 or more parties to exchange a sequence f cash flows over a period of time, at specified intervals.

Options - financial contracts which give their holder flexibility - the right, but not an obligation to buy/sell an asset at a specified price if market conditions are favourable. 'Put option' - the owner of a put option has the right to sell the good at a specific price and this right lasts till specific date. To acquire this right option buyers must pay price - premium to the option seller.

Lecture 1

Dictionary