ABSTRACT
This chapter describes the specification of vessel value derivative contracts, namely the Sale & Purchase Forward Agreement (SPFA). It showcases how vessel value derivatives can be used for hedging purposes through practical examples. The chapter discusses a pricing formula which allows the calculation of the “fair” value of forward contracts on vessel values. It examines how the risks emanating from fluctuations in vessel demolition prices can be hedged using derivative contracts written upon scrap prices, namely the Baltic Ship Recycling Assessment (BSRA). The existence of derivative contracts written upon benchmark vessel prices could be a beneficial tool for: (i) shipowners, as vessel price derivatives safeguard the value of the collateral (the vessel) in a shipping bank loan agreement, allowing to achieve higher levels of leverage. An efficient S&P vessel market would make such arbitrage opportunities short-lived, as the collective action of market participants should bring prices back to their “fair” levels.
