Question: Explain what hedging strategy the charterer would use. Suppose that today is 18th of May and a charterer is interested in transporting coal from the

Explain what hedging strategy the charterer would use.

Suppose that today is 18th of May and a charterer is interested in transporting coal from the US Gulf to Japan under a voyage charterparty two months from today on 31st July. The current freight rate for this trip is $23.1/mt. In order to protect himself from adverse freight movements, which may occur by the day of the physical fixture (30th July) the charterer decides to use FFA contracts. He gives the following specifications to his broker: (a) route P2 (US Gulf-Japan) of the BPI, (b) cargo size 51,400 mt. The broker searches for a suitable counterparty, a shipowner who wants to trade FFA contracts with contract dates, 30th June, 31st July and forward price $21.8/mt, $23.5/mt, respectively. In the meantime, end of May he secures two voyage contracts at a freight rate of $23.588/mt finishing 30th July and 31st July. At the same time, on the 31st May he offsets his FFA position at the settlement rate of $23.8/mt and $25.6/mt, respectively.

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