Derivatives derive their value from underlying assets such as physical commodities, equity indexes, or services. There are two main families of derivatives: options and futures/swaps/forwards. Futures are standardized, cleared, and regulated contracts where counterparties exchange the future value of an underlying at a given time. Forwards and swaps are similar to futures but are not standardized and are mostly traded over-the-counter. Derivatives are used for hedging risk, arbitrage, and speculation. Shipping companies use derivatives like forward freight agreements to hedge risks from short positions in freight markets.

1. WHY DERIVATIVES?
« Derive » their value from an underlying:
- Physical commodity
- Equity index
- Service
Jeudi le 16 Octobre 2014,
Université de Moncton
Mr. Pietro Terzano, Manager, Hedge Fund Seaway S.A.M, Monaco.

2. Physical good mirrored in the index
INDEX

3. Derivatives are a tool. How are they used?
• Hedging (Risk Transfer)
• Arbitrage
• Speculation
• Weapons of Mass Destruction

4. 2 Big Families
• Options
• Futures, Swaps, Forward
Futures are standardized , cleared and regulated contracts, whereby
counterparties exchange the « future » value of an underlying at a given
time.
Forwards and swaps are different as they are not standard and mostly traded
OTC.
Forwards and swaps are similar. A Forward involves a single settlement in the
future a swap a series. Think of swaps like a series of forwards.
Often settled against monthly (index) averages .

5. Practical application
• Seaway is a drybulk shipping operator. Profit is made trading or
arbitraging the physical market. We get contracts from client to
move commodities from A to B at a given price and…?
• Are we long or short the freight market?

6. SHORT!
• We close the short with a long position, chartering a physical vessel
or using a derivative a FORWARD FREIGHT AGREEMENT ( FFAs). What is the
diffference?
We buy the monthly average of the a representative index the Baltic
Exchange Dry Index on the proper route.
Index is expressed in USD/DAY
• How is it produced?
• How are the trades settled?
• What are my risks?

7. Bunker (fuel oil) on redelivery
• We are short bunker at a given price and time in the future. We need
hedging
• Brent price and crack spread (what is it?) influence bunker price in the
principal world bunker hubs. Bunker hubs influence price in the ports
around them
• But if brent is traded in futures and bunker in swaps how do I switch
from one to the other?
• What will happen at delivery?
• What is a P