Hedging

• Liquidity
• Hannes Wolff
  GMT 18:58
  22nd Mar 2007

  Good Day!
  I would like to know which derivative markets for bunker hedging are really liquid enough!
  
  I know that the most liquid markets are those for swaps, especially 3.5% barges Rotterdam and 3% US Gulf. What about other swaps, e.g. Singapore? What about futures, forwards and options, swaptions etc.? Is there sufficient liquidity to trade?
  
  Thanks beforehand for your reply. With best regards,
  
  Hannes Wolff
• Janet Lawrence
  The Oxford Princeton Programme
  
  GMT 19:46
  22nd Mar 2007
  IP: x.x.78.175

  Mr. Wolff,
  
  Sorry if I didn't answer this question when you first asked.
  
  I'm not in a position to be able to tell you about the liquidity of various derivative products. What I suggest is to inquire with derivative brokers and with other traders (whom you trust) in your market. Sometimes hedgers just have to experiment a little with different products to get a feel for the liquidity of each. And remember that different market conditions will also affect liquidity.
  
  I hope I have answered more thoroughly this time?
  
  Janet Lawrence
• Hannes Wolff
  GMT 19:56
  22nd Mar 2007
  IP: x.x.35.114

  Thanks again for your support.
  
  My understanding is that swaps are the most liquid derivatives for bunker hedging, especially the 3.5% barges Rotterdam and 3% US Gulf. With regard to the other markets I am not sure, but I heard options are not that liquid. I would be pleased if somebody can give me some advise on that. My MSN: hanneswolff@hotmail.com and my skype name is HannesWolff
  
  Thanks and best regards,
  
  Hannes Wolff
• Mikal Bøe
  IMAREX Asia Pte Ltd
  GMT 06:09
  23rd Mar 2007
  IP: x.x.18.34

  Hannes,
  
  The fuel oil paper market, whic is the one you need to use for hedging bunker fuel exposure is very liquid.
  
  The difference between the fuel oil market and the bunker market is that fuel oil is wholesale (cargoes) and bunkers is retail (parcels). Bunkers trade at a premium to fuel oil becuse of blending, barging, taxation, overheads and profits for the supplier. Otherwise they`re pretty much the same. Paper is attached to fuel oil because the oil traders which dominate the market use this as a major part of their price risk management practice. Shipowners are still a very very small part of the fuel oil paper market, and often get a rough deal when dealign with "specialists" and banks.
  
  For IFO380 hedging you would use 3.5% Barge Swaps in Rotterdam, and IFO180 Swaps in Singapore. For USA/Americas you would use USG3.0% Waterborne swaps or NY Harbour. Look at options too, since these offer you a much better hedge than plain swaps.
  
  Rotterdam 3.5% swaps trade around 600 million tons per year equivalent. (Rotterdam physical is arounn 18 million tons)
  
  Singapore IFO180 (you use 180 rather than 380 because of the liquidity) trade around 400 million tons equivalent, even though Singapore is a much larger bunkering port than Rotterdam.
  
  USG and NYH are harder to ascertain but there`s plenty of liquidity to hedge your bunker requirements. There is also a vibrant fuel oil market for the Med.
  
  To hedge NWE 1.5% Sulphur fuel you can combine 1 part NWE1% and 4 parts 3.5% paper.
  
  Remember, all fuel oil swaps are Platts settled.
  
  To get advice on how to hedge your bunkers, which strategy to employ, which prices to trade and how to execute, call the IMAREX fuel desk in Oslo on +47 2389 4234.
  
  IMAREX has 165 members trading freight and fuel oil paper. You can learn more at http://www.imarex.com/markets/fuel_oil_derivatives.
  
  Hope this is helpful.
  
  Mikal Boe
  Managing Director
  IMAREX Asia Pte Ltd (Singapore)
  Tel: +65 6720 0050
  
• Hannes Wolff
  GMT 18:47
  23rd Mar 2007
  IP: x.x.35.114

  Mikal,
  
  Thanks for this valuable information.
  
  In the swap market there surely is sufficient liquidity, but what about the option market?
  
  Also for the swap market it is quite easy to get an idea of the cost of a swap by looking at the published prices. In the case of options however I find it hard to get an idea of a possible hedge. In todays market, for hedging 3.5% barges Rotterdam basis 1000 mt, what would be a possible price band to achieve with a zero cost collar? Or what would be the cost of buying a call option basis 1000 mt at 3 different strike prices for April and/or May?
  
  Thanks for your support in this matter.
  
  With best regards,
  
  Hannes Wolff