shipowners try to reduce this expenditure, their strategies did not give any results and they keep suffering from reduced profits (Stopford, 2014). An interesting example, as shown in the below 2 nd graph, is the bunker price of 180cst in March 2009 was 278.06 $/mt and in January 2014 was 600$/mt, as it was doubled within 68 months (Bunkerindex.com 2014), making hedging imminent, if it is not a common practice. Additionally, since the vessels are in spot market, the Owner bears the cost. Graph Nr. 2 3
1.3 Interest-rate and currency-rate risk This type of risk takes place when an unexpected change in interest rates happens and affects the cost of credit of the shipping company in a negative way. These movements in interest rates cause unstable cash flows. The higher the financial leverage of the company is, the larger its exposure to interest rate risks. Moreover, there are cases where shipping companies are exposed to currency-rate risk, as well, since they need to convert certain fund in one currency to another. 1.4 Asset price risk The asset price risk derives from the oscillations of the assets price. The vessels of the Company are its assets, therefore, volatility of ship prices is an important factor for shipowners, not only because it affects the balance sheet value of the company, but also because a reduction in the value of a ship may affect the creditworthiness of a shipowner and its ability to service debt obligations. On the other hand, charterers are indirectly affected by the value of the vessels since if the Owner sells the vessels, they will not have vessels to transport their cargo, and therefore, transportation costs will be increased. 1.5 Credit risk Credit risk is the risk that comes from the uncertainty of the fulfillment of the obligations of the other party, causing financial damages. This type of risk arises due to the fact that the two parties decide to make business and that deal is based on the trustworthiness of each party. In our case, we consider that the credit risk is minor since both the Shipper and the Carrier are reputable parties, being many years in the industry. 1.6 Political Risk It is evident that nowadays there is huge political instability around the world, from the USA to Eastern Mediterranean and from Russia to China. We consider, however, that the Charterer is primarily exposed to such kind of risk, as he operates raw materials from countries where political decisions have a direct impact on trade (taxation, etc.) 1.7 Pure Risk Lastly, pure risk is defined as the risk of the reduction of the value of the assets due to a natural disaster, accident, human mistake. (Alizadeh and Nomikos 2009). Although pure risk can be controlled and managed to the extent possible, unpleasant and unexpected 4
events may always happen. In order to prevent the company from suffering such kind of losses, the purchase of insurance contracts, covering these costs, is inevitable.
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