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If the monthly average index price drops to $96, the shipowner pays $4/MT to the counterparty, increasing the shipowner's net cost to $100/MT.
If the monthly average index price rises to $105, the counterparty pays $5/MT to the shipowner, bringing the net cost back down to $100/MT.
Introduction to Hedging

Swaps are the most common hedging mechanism. Other risk management tools include option caps and various collars. Your OceanConnect representative will be happy to discuss all of these hedging alternatives with you.

How a Swap Works: A shipowner wishes to protect his Rotterdam bunker budget for the next 90 days by locking in current price levels. The shipowner contacts an OceanConnect broker, who in turn canvasses the potential Rotterdam market makers to obtain, through competitive offers, the best price. After negotiation the shipowner and a counterparty agree to a $100 fixed price component 'swapped' for a floating reference price for 25,000 tons over a period of 60 days.

If Prices Rise Above $100: If the 60-day average rises to $105 per MT, the counterparty pays the shipowner $125,000 (the $5 increase times the quantity of 25,000MT). Although the prices the shipowner will pay in the physical market are higher than the swap price by $5, the counterparty's payment offsets the increase, and the shipowner's net expenses are still $100 per ton for the period.

If Prices Drop Below $100: If the reference average drops to $96 per MT, the shipowner would pay $100,000 to the counterparty (the $4 drop times the quantity of 25,000MT), but this expense is offset by lower costs in the physical market. Again the net effect is a cost of bunkers of $100 per MT.

The Benefits of Risk Management

Shipowners protect profits from unforseen increases in fuel costs...

The Benefits of OceanConnect

Competitive offers help find you the best risk management solution...

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