Chapter 5 - freight market

Question 1

Which two types of transactions does the freight market have? In which situations are each suitable?

Answer 1

1. Freight contract - shipper buys capacity from ship owner at fixed rate per tonne. Suitable shippers who prefer to pay an agreed sum and leave management to shipowner
2. Time charters - ship hired per day for predetermined period. Suitable for experienced ship operators who prefer to manage transport themselves

Question 2

When is a ship fixed?

Answer 2

When a ship is chartered, or freight tariff agreed upon

Question 3

Who are the roleplayers in the fixing of a ship?

Answer 3

1. Shipowner - makes ship available on market
2. Charterer - someone with a volume of cargo that needs to be transported or a company that need an extra ship for a period of time
3. Shipbroker - appointed by the owner or charterer to bring ship and cargo together

Question 4

What are the four types of contractual arrangements?

Answer 4

1. Voyage charter
2. Contract of affreightment - voyage charter with agreement to carry a series of cargo parcels for a fixed price per ton.
3. Time charter
4. Bare boat -

Question 5

Describe a voyage charter

Answer 5

Voyage charter - provides transport for specific cargo from port A to B for a fixed price per ton.
Charter-party drawn up - details contract terms - demurrage and despatch

Question 6

Describe a contract of affreightment

Answer 6

Ship owner carries a series of cargo parcels for a fixed price per ton. Shipowner can use and schedule ship more effectively (backhaul)

Question 7

Describe a time charter and the lengths

Answer 7

Charterer has operational control of ships, leaving ownership and management to shipowner. Charterer pays all voyage expenses (port charges, canal dues), Shipowner pays operating costs (crew, maintenance)
Lengths:
Trip - single voyage
Period - period of months or years

Question 8

Why might subcontracting be attractive (time-charter)?

Answer 8

1. Shipper may not wish to be an owner, but business requires use of ship under their control.
2. Time-charter may be cheaper than buying
3. Charterer may be a speculator taking a position in anticipation of a change in the market

Question 9

Describe a bare-boat charter

Answer 9

Company has full operational control without owning it. Manages voyage aswell as operating costs. Invester usually buys ship and hands it over for 10-20 yrs. Charterer doesn’t have to invest large amounts of capital. Investor may obtain tax benefit

Question 10

What are the different types of freight rate statistics?

Answer 10

1. Voyage rate - for dry cargo reported in US dollars per ton
2. Time-charter - measured in thousands of dollars per trip (6 months, 12 months, 3 years)

Question 11

Describe the charter-party and why it is crucial

Answer 11

The charter-party is drawn up after an agreement is reached. It makes provisions for problems that might arise - both parties agree on who is responsible for costs to prevent legal steps

Question 12

What are the six main components of a charter-party?

Answer 12

1. Details of the ship and contracting parties
2. Description of cargo, name and address of shipper
3. Terms on which the cargo is to be carried
4. Terms of payment
5. Penalties for non-performance
6. Administrative clauses

Learn the details for each point from textbook

Question 13

Understand freight derivatives from textbook

Answer 13

NB

Question 14

What are the requirements for a freight derivatives market?

Answer 14

1. Reliable base index for settling the contract
2. Market must be liquid enough to allow quick placement of contracts
3. System required to make sure the parties meet their obligations on the settlement date

Question 15

Explain the freight market index

Answer 15

Provides investors and others an idea of how much it will cost to move major raw materials by sea. Changes in BDI can give investors insight into global supply and demand trends (leading indicator)