Hedging Effectiveness in Shipping Industry during Financial Crises

Aristeidis Samitas*
University of the Aegean, Business School, Department of Business Administration, 8 Michalon Str., Chios 82100, Greece E-mail: a.samitas@ba.aegean.gr *Corresponding author

Ioannis Tsakalos
University of the Aegean, Business School, Department of Business Administration, 8 Michalon Str., Chios 82100, Greece E-mail: i.tsakalos@ba.aegean.gr

Abstract: This paper investigates the significance of financial derivatives in shipping firms and its potential impact on their firm value. The methodology applied in order to measure firms value is Tobins Q. The investigation whether shipping firms can decrease their risk exposure and increase their value by using financial derivatives is considered to be essential. The sample of this study consists of shipping firms which are listed in US Stock Exchanges where the impact of financial crisis was first seen. The empirical evidence of this paper indicates that the use of derivatives minimise shipping firms risk exposure and guarantee their growth.

Keywords: Hedging effectiveness, Financial Crisis, Risk Management, Bunker Derivatives, Freight Forward Agreements, Vessel Value Derivatives, Shipping.

Electronic copy available at: http://ssrn.com/abstract=1539689

Reference to this paper should be made as follows: Samitas, A. and Tsakalos, I. (2009) Hedging effectiveness in shipping industry during financial crises, Int. J. Financial Markets and Derivatives, Vol. x, No. x, pp. x-xx.

Biographical notes: Aristeidis Samitas is an assistant professor at the Department of Business Administration in the University of the Aegean. He studied Economics at the University of Athens (B.Sc., 1995) and Banking and Finance at the University of Birmingham (M.Sc., 1996). He also holds a Ph.D in economics and finance from the University of Athens (2000). His main research interests are financial risk management and portfolio management. Ioannis Tsakalos is a Doctoral candidate at University of the Aegean in Chios Greece. His research interests are energy economics and applied finance. He, also, works in a shipping company.

1 Introduction

Since the end of 20th century, shipping industry grew rapidly. This development was portrayed to the increased demand about its services, high freights levels and increased orders and demolitions numbers (see Table 1 and Table 2). In May 2008, Baltic dry index (BDI) reached the best historical level of 11973. These high freights levels expected to continue for the next years. This is the main reason which led shipping firms to bigger investments. Vessels prices and the orders for new building vessels were sky-high, too. Many owners of new building ships used to sell vessels which were still in the shipyards. Buyers of these new buildings expected to gain big

Electronic copy available at: http://ssrn.com/abstract=1539689

profits as market seemed to offer them promptly. Even though market conditions were auspicious, dangers lurk and their management was necessary.

Table 1

Year 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Note: 1. Figures are in excess of 10.000dwt. 2. New building orderbook include bulk carriers and tweendeckers and Demolition figure include bulk carriers, tweendeckers and dry trading combination carriers. 3. *Trading Source: Allied Shipbroking Inc.

Annual Dry Bulk Fleet Statistics (Tonnage in excess of 10.000dwt) Delivered/Orderbook Scrapped Change No. of Vessels Dwt tonnes No. of Vessels Dwt tonnes Dwt tonnes 253 15.383.914 70 2.205.298 13.178.616 269 17.767.024 229 8.841.431 8.925.593 298 19.153.351 283 8.346.580 10.806.771 216 11.632.807 408 14.270.883 -2.638.076 204 13.305.105 315 10.388.739 2.916.366 181 13.111.990 222 5.624.963 7.487.027 309 20.538.762 329 10.175.465 10.363.297 228 14.344.902 221 6.961.240 7.383.662 169 11.840.201 165 5.008.826 6.831.375 265 19.649.307 34 865.359 18.783.948 308 23.153.090 31 1.147.608 22.005.482 313 25.912.494 78 2.437.722 23.474.772 315 23.964.177 19 511.368 23.452.809 333* 23.434.464* 121 5.481.371 17.953.093 962 71.265.194 1.246 113.258.706 853 77.295.596 297 28.840.510 49 5.613.400 5 1.392.800 -

Table 2 Year 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Annual Tanker Fleet Statistics (Tonnage in excess of 10.000dwt) Delivered/Orderbook Scrapped No. of Vessels Dwt tonnes No. of Vessels Dwt tonnes 101 8.589.468 35 3.678.663 156 13.179.104 52 7.300.683 212 20.573.210 114 15.454.531 182 21.199.934 135 12.416.207 126 14.168.230 116 13.801.976 207 23.537.223 149 12.400.587 312 30.790.160 177 13.752.938 330 28.012.183 118 7.515.321 346 29.789.749 72 4.188.794 373 25.978.153 80 3.466.745

Change Dwt tonnes 4.910.805 5.878.421 5.118.679 8.783.727 366.254 11.136.636 17.037.222 20.496.862 25.600.955 22.511.408 3

2007 415 30.268.254 85 3.872.462 26.395.792 2008 504* 35.304.254* 80 5.739.885 29.564.369 2009 844 64.309.106 2010 583 52998.103 2011 375 51.600.584 2012 58 8.462.177 2013 5 471.000 2014 2 214.000 Note: 1. Figures are in excess of 10.000dwt and include tankers and wet trading combination carriers. 2. *Trading Source: Allied Shipbroking Inc.

Why shipping firms try to manage their risks? Beyond the functional risk, market risk is another danger that shipping firms have to face. Apart from good market conditions, they wish to lock their profits, keep a good cash flow level and secure their survival and growth. So, they adopt risk management tools in order to gain aforementioned targets. Regarding vessels operational cost, marine fuel oil (MFO) constitutes around the 40% of them. During period June-July 2008 when Brent oscillated above 140usd/bbl, above mentioned percentage was much higher. Basis this economic environment, it is well comprehensible that shipping firms owe to protect their financial survival and growth. Thus, they use freight forward agreements (FFAs) and bunker derivatives. Banks and shipping related companies offer these products. Banks knowledge weakness for this particular market helps the growth of newly established companies which are usually subsidiaries of shipping related firms. There are several key goals associated with hedging effectiveness such as (1) shipping derivatives help shipping firms to avoid market risk exposure; (2) risk management give a premium to firms financial value; and (3) shipping firms may keep growing during financial crisis. Risk management tools help shipping companies to add financial value and secure high earnings and low operational costs. 4

The purpose of this paper is to examine whether derivatives and risk management add financial value to shipping firms and secure their position against MFO prices and freight rates volatility, especially during turbulent economic periods. The rest of the paper is structured as below. The next section refers to bunker, freight and vessel value derivatives and section 3 provides the literature review. Section 4 outlines the data and methodology used and section 5 provides the empirical results. Finally, paper concludes by section 6 which refers to studys implications.

2 Shipping Derivatives

Shipping among many other industries came against a very bad economic period. Suddenly, freight rates dropped dramatically and shipping firms socked as they didnt expect such a big disaster within only a few weeks. This study indicates that risk management is a tool which leads firms to secure profits and continue growing. First of all, hedging tools in shipping industry grew rapidly last years. Derivatives market is mainly over the counter and this is a crucial issue for its development.

2.1 Bunker Derivatives

Marine fuel oil or bunkers prices are different per harbour and depend on some specific indices. Thus, beyond refine, transportation, storage and delivery cost, bunkers prices depend on various indices. For example, bunker prices in Piraeus port may rise despite the fact that Brents price per barrel decreases. There may be many reasons for this increase, such

as reserves reduction in Piraeus port, increased demand due to limited product availability in other Mediterranean ports, political facts in the wider region, new regulations, OPEC decisions e.t.c. The indices used in order to price bunkers are published by Platts, a private firm resides in London. These indices refer to cargoes in concrete regions and are acceptable from all interested parties. On top of these indices, suppliers add their cost (refining, transportation, storage, delivery) and profit and get the final bunker prices. The most commonly used oil products in the shipping industry are distinguished in distillate and residual fuel oil. Distillates are the following products: marine gasoil (MGO) and marine diesel oil (MDO). On the contrary, the main residual products are the following: 380cst and 180cst. After several regulations, vessels have to use only low sulphur bunkers in designated areas such as the region of Northern Europe (English Channel, Baltic) and all European Union ports except Greek and island clusters (e.g. Canary Islands) ports, due to environmental reasons. Low sulphur products are more expensive and firms operational cost is much higher. Shipping firms try to face bunker prices high volatility and escape the turbulence by using various methods that are presented below. Due to low volume and demand for shipping related derivatives, bunker derivatives are trading over the counter. One of the main ways for shipping firms to freeze their main operational cost is a swap. Swaps stabilize firms bunkers cost, but refer to main ports such as Houston, Rotterdam, Singapore and Gibraltar. Port differential is a way to expand their use in other ports too, but this differential is not always the same. So, if vessels schedule is already known, swap is a common way to avoid marine fuel oil prices volatility.

However, if ship operators expect a decrease in prices, they can just determine their maximum bunker prices by fixing a cap agreement. Shippers can use this right when market is over the cap level and they have the ability to buy on spot when market is below the agreed level. Of course, there is a premium for this agreement which is much higher than a collar derivative. Collar derivatives are agreements based on a cap and a floor price level. Shipping firms buy a cap and they sell a floor concurrently. So, when market is above the cap, they get back the difference and when market is lower than the floor they pay an extra cost which is the difference between the floor and the current price. Finally, when market is within the two pre-agreed levels then there is no settlement. In November 2008, bunker market followed Brents drop and decreased rapidly. Prices dropped down to levels seen back in the end of 2004 when 380cst HSFO in Rotterdam cost around 160usd/mt (see Graph 1-4). Even though, freight rates reached record bottom (see Graph 5), shippers could agree on a low fixed price level, too. Fixed prices advantage is that shipping firms know exactly what they will pay and they just need to take care of their freight rates. Finally, tailor-made solutions give shippers the benefit to hedge their risk exposure taking into consideration their needs and market expectations. Bunker derivatives use is still limited, but very helpful for shipping operators.

2.2 Freight Derivatives

Freight derivatives are based on various freight indices which constructed by Platts or Baltic Exchange and introduced in 1992. Platts publishes some wet contracts and Baltic Exchange both dry and wet contracts. FFAs are mainly traded over the

counter. Brokers, such as Clarksons, GFI and Simpson, Spence and Young (SSY), offer freight derivatives to their customers as well as banks and some trading houses. This niece market became a wealthy sector for all interested parties. High demand led aforementioned firms to develop their services and freight clearing houses created in order to serve their clients. Freight clearing houses are: London Clearing House Clearnet (LCH.Clearnet), Singapore Stock Exchange and Norwegian Futures and Options Clearinghouse (NOS Clearing). Last years freight paper market increased rapidly and shippers had the opportunity to secure good freight rates. High debts, result of their investment policy, pushed them to lock their high earnings. Some of them tried to gain money by speculating on freight rates volatility. Markets knowledge together with increased demand for shipping services was a good background for the development of freight derivatives. International Maritime Exchange (IMAREX) based in Oslo trades freight forward agreements since spring 2000. IMAREX was founded by some Norwegian public limited companies. New York Mercantile Exchange offers freight derivatives since May 2005, as well as Singapore Stock Exchange a few years ago. In 2006 Forward Freight Agreement Brokers Association (FFABA) founded by Clarksons, Ifsor and Freight Investor Services tried to develop futures trading. Furthermore, Baltic International Freight Futures Exchange (BIFEX) contracts underlying asset is an index which consist some trading routes. On the other hand FFAs underlying assets are different and specific trading routes like Baltic Panamax Index (BPI), Baltic Handymax Index (BHMI), Baltic Capesize Index (BCI) and Baltic International Tanker Index (BITR). Graph 6 presents BCI curve for Calendar 2009 during 2008. This is one of the main and most important differences

between these contracts and FFAs come to fill the gap and fulfil interested parties needs. Secured freights guarantee standard earnings. Swap is the first way to hedge. In this case, two parties pre-agree the freight for a specific route(s), a specific period or voyage and a certain quantity. So, shippers know their freights level and manage the market risk efficiently. Even though results are useful, OTC derivatives are contracts which are agreed between two parties. So, both parties accept the credit risk from each other and both parties must be reliable. Futures market seems to be the solution for shippers, but it might lead them to many loses if credit control has boundaries. Shipping industry has a low number of listed companies and financial reports are not available for co-parties. So, shipping industry had to revise foundation processes in order to keep developing risk management usage. Hybrid FFAs come to cover this simple FFAs disadvantage by using a broker between two parties. The warrantee counter-party for both interested parties is LCH.Clearnet (Kavussanos and Visvikis, 2006a). Freight options entered the market in 1991, but low volume doesnt allow their further development. Freight options, widely known as Asian options, are available and they refer to specific routes of both wet and dry market. Freight options application is similar to same contracts for exchange rates or stocks. The only difference is the underlying asset. Moreover, shippers might adopt a specific strategy and not only buy or sell an option. Such strategies are the following: Bull and Bear spreads, Butterfly spreads, Calendar (or time) spreads, Diagonal spreads, Bottom or Top Straddless, Bottom or Top Strip, Bottom or Top Strap and Bottom or Top Strangle (Kavussanos and Visvikis, 2006a).

2.3 Vessel Value Derivatives

Vessel is the main asset of shipping firms. Thus, their market value is important and a key factor for analysts to price firms value. Despite the big drop on bulk carriers prices, tanker markets drop was not analogous. In respect to stock market investors who buy different stocks in order to be protected from markets risk, diversified fleets is a way of hedging for shippers, too. Even though this is not so easy, as physical business has many parameters which may lead a business to distraction, shipping firms operating in different markets have many chances to keep their earnings to better levels than others who bet on a specific market (Kavussanos and Visvikis, 2006a). On the other hand, shippers are able to hedge their vessels value by using Sale and Purchase Forward Agreements (SPFA), previously known as Forward Ship Valuation Agreements, and Baltic Sale and Purchase Assessments (BSPA), previously known as Baltic Ship Valuation Assessments. Due to the fact that underlying assets volatility is not big enough, reporting is not on a daily basis like freight rates. Moreover, hedging assets like vessels is not easy because both indices refer to five years old vessels which cannot be portrayed to older fleets. Even though, disadvantages are important, the beginning of such an evaluation is an additional tool for shipowners in order to face more efficiently crises and turbulent economic periods. Finally, there is another important tool for shipping firms. Vessel scrapping derivatives started trading in July 2004 and refer to second hand vessels scrap value. If market is strong enough, owners delay their demolition and vice versa. Also, scrap value and vessels age have a strong positive relationship. In Table 1 and Table 2, demolition market grew together with orders/deliveries for new building vessels. In

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case scrap value is getting up, then more vessels are getting in scrapping. This kind of derivatives are called Baltic Demolition Assessments (BDAs) and is a good tool for owners to lock good scrap values and keep using their fleet for a few years more, hoping to make additional profits (Kavussanos and Visvikis, 2006a).

3 Literature Review

Since last decade, shipping industry became more and more interesting due to its incredible increase in profits and its services demand. Despite the fact that everything seemed wealthy, market was mature and shipping firms were still investing in new building vessels, freight rates dropped dramatically. Even though financial crisis started about a year and half ago summer 2007 in USA, only a few companies tried to be protected. The unexpected decrease in shipping firms income couldnt be avoided during a turbulent economic environment. Shipping firms loans were too high and the debts they had to pay were very big comparing with their financial statements. Their investments were supported to markets demand, but no one believed that this demand would drop within a few weeks. This is why only a few of them tried to protect their positions in the market either by using freight forward agreements (FFAs) or foreign currency derivatives in order to hedge their risk against the currency fluctuations. The shipyards in China, Korea and Japan had many orders for new building vessels and the expectations for higher freight rates were many. So, risk management and hedging were not popular words in shipping dialogue, but now seem to be essential and a new subject for board meetings.

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There are many studies that refer to risk management and its benefits to the companies which use hedging tools against their risk exposure. Previous studies regarding risk management, such as Allayannis and Weston (2001) who investigated the relationship between the usage of foreign currency derivatives and firms value, concluded that there is a positive relationship between them and derivatives help firms to add financial value significantly. On the other hand, Jin and Jorion (2006) found that oil and gas companies value in US have no positive impact by using derivatives. The benefit they gain is that their stocks do not follow oils and gases price volatility. Carter, Roger and Simkins (2004) disclosed that hedging creates firm value on US airline industry. Moreover, Lookman (2003) investigated derivatives impact on oil and gas exploration and production firms. His findings prove that hedging primary risks influence firms value negatively because they put limits in firms production. On the contrary, he found that firms get a premium when they hedge their secondary risks. Bartram, Brown and Fehle (2003) investigated the usage of derivatives in non financial and non US firms and found that hedging is a process that significantly adds firm value. Guay and Kothari (2003) disclosed that firms spend only a small amount for hedging compared to their financial value and this cannot be a variable which influences firms value significantly as there are too many proxies that might have greater impact than derivatives. Lessard (1990), Froot, Scharfstein and Stein (1993) found that firms using derivatives reduce variation in earnings and cash flows. ElMasry (2006), also, found that UK non financial companies use derivatives in order to manage the volatility and ensure good cash flow levels. Casey (2001) highlights the fact that investment, finance and hedging strategies should go hand in hand.

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Moreover, Gay and Nam (1998) agree with previous studies [Nance, Smith and Smithson (1993) and Froot, Scharfstein and Stein (1993)] which outlined that derivatives use increases while liquidity increases and the opposite. However, Nguyen and Faff (2002) argue with their findings. Regarding shipping industry, Kavussanos and Visvikis (2006b) confirmed that risk management in shipping and shipping derivatives help ship-owners and charterers stabilize their income and their costs. They collected and summarised previous studies such as Cullinane (1991) who found that shipping firms were aware of Baltic International Freight Futures Exchange (BIFFEX) contracts but not keen on using them because they thought this was helpless. According to hedging instruments awareness, Dinwoodie and Morris (2003) concluded that some participants in their survey (their sample consist of 22 tanker ship-owners and 8 tanker charterers) didnt know the function of FFAs and most of them they didnt even use any kind of hedging. Kavussanos and Nomikos (1999) disclosed that future market is a good signal for spot prices and gives useful information to shipping market participants. Thus, shipping firms have the opportunity to use this information without paying the risk premium. Even though, this was seemed to be an accurate rule and future market expected increased freight rates, ship owners and charterers came against a very bad position where they face financial problems. Kavussanos et all (2005) investigated the usage of hedging in Greek shipping market and they disclosed that traditional ways of thinking have to change and Greek ship-owners have to adopt new risk management strategies. Also, shipping derivatives and risk management are new tools for Greek ship-owners which they need to be educated and promoted.

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4 Data and Methodology

The sample of our study consists of US listed shipping firms which are trading in various markets and own following types of vessels: a) bulk carriers (BC), b) tankers (TSH), c) containers (CN), product tankers (PT), liquid natural gas carriers (LNG), liquid petroleum gas carriers (LPG), Roll-on/Roll-off (RORO or ro-ro), Oil/Bulk/Ore carriers (OBO). Companies selection became taking into consideration their sectoral differentiation, so as to get a better view for the market that does not only represent a sector, which can be influenced individually from accidental factors. Our sample is constituted by twenty-nine shipping enterprises. Table 3 presents the firms of our sample as well as the exchanges listed, the ticket they trade with and their fleets type(s). Data selected from DataStream, Bloomberg and firms websites. This studys data are from January 1st 2005 till December 31st 2008. The period that we examine includes quarterly observations, in order to check the hedging efficiency before and during the crisis 2008. In addition, US market is the first economy that came against the crisis since mid 2007 and it is the market where most shipping firms are listed. Also, shipping industry is a particular market and only a few firms are listed. Most of them are owned by one person/family or a few shareholders who they do not prefer their company to be listed. Sample is divided according to whether firms use derivatives or not. The variable used in order to measure firms value is Tobins Q. This equation is defined as the ratio of the firm market value to the replacement cost of its assets. If Tobins Q

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exceeds unit then firms value is higher than every other replacement cost. Literature provides many different definitions of Tobins Q, but we adopt the Market price to Book value (MV/BV) as the proxy of firms value. In order to draw the requested results, Ordinary Least Squares (OLS) regression is used. OLS is a method to analyze panel data and used to several previous studies [Chung and Pruit (1994); Choudhry (2000); Allayannis and Weston (2001); Anderson et al. (2004); Rao et al. (2004); Matzler et al. (2005); Mittal et al. (2005)). Our model is as follows: Ln(Tobins Q) = + hedge + X + (1)

where Tobins Q is the proxy for firm value, hedge is the hedging dummy, X is the number of control variables and is the error term. We use logarithms to control the skewness. The independent variables we use are firms net cash flow (NC) and firms net debts (ND) and the dependent variable is MV/BV.

Table 3 Sample Company Hedgers B&H Ocean Carriers General Maritime Ship Fin. International LTD Teekay Corporation Tsakos Energy Navigation Excel Maritime Carriers Frontline Grupo TMM Non Hedgers Alexander & Baldwin Aries Maritime Arlington Tankers Danaos Corporation Eagle Bulk Shipping Euroseas Freeseas Inc. Genco Shipping & Trading Horizon Lines Inc.

Ticket BHO GMR SFL TK TNP EXM FRO TMM

Exchange AMEX NYSE NYSE NYSE NYSE NYSE NYSE NYSE

Fleet Type BC TSH TSH TSH TSH BC TSH TSH OBO BC CN

AXB RAMS ATB DAC EGLE ESEA FREE GNK HRZ

NYSE NASDAQGS NYSE NYSE NASDAQGS NASDAQGS NASDAQGM NYSE NYSE

CN PT TSH CN BC BC BC BC CN

CN

CN

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International Ship. ISH Kirby Corporation KEX Knightbridge Tankers VLCCF Oceanfreight OCNF Overseas Shipholding Group OSG Paragon Shipping PRGN Rand Logistics RLOG Seaspan SSW Top Ships TOPS Ultrapetrol ULTR Nordic Amer.Tkr. Ship. NAT Stealth Gas GASS Source: Bloomberg and Tradewinds

NYSE NYSE NASDAQGS NASDAQGM NYSE MASDAQGM NASDAQCM NYSE NASDAQGS NASDAQGS NYSE NASDAQGS

RORO TSH VLCC BC TSH BC BC CN TSH TSH TSH LPG

CT TSH BC

BC BC

5 Empirical Results

First, we investigate for stationarity using the Augmented Dickey Fuller (ADF) and Phillips-Perron (PP) tests. Results determine that there is no stationarity. Several diagnostic tests were carried out like Breusch-Godfrey test for higher order autocorrelation and White test for heteroskedasticity. In this research we investigated hedging effectiveness on shipping firms value. Positive premiums on firms value are sign of security and a tool for investors who need safe investments during financial crises. The evidence from our sample indicates that the results produce 78% premium on shipping firms value. Applying the Tobins Q methodology the results indicate that shipping firms can take advantage and produce development during crises. However, shipping industry tends to be more volatile in the beginning of 2009 and firms must take paper positions in order to take advantages like booking low bunker prices. Table 4 contains the summary statistics of our sample as well as of our subsamples. Only 33,4% of them use derivatives and this is one of the main reasons which led firms like BBL in UK and Ukrainian Industrial Carriers bankrupted. A

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company is considered a hedger when it uses any kind of derivative contract for risk management purposes and in this case the hedge dummy takes the value of 1. The mean value of Tobins Q in the whole sample is 1.85 which is higher than the median value (1.728). This means that there is a right skewed distribution and we use the natural logarithm of Tobins Q in order to get a more symmetric distribution. Moreover, above mentioned mean value is greater than the unit and this is a sign that firms generate greater profits than their capabilities. A brief comparison of the data presented in this table, firms which use derivatives have bigger debts than the one which do not use derivatives. This might be a sign that firms that proceed to big investments, like orders for new building vessels or purchasing expensive vessels when market is sky high, try to handle their exposure by using derivatives. Moreover, firms using hedging instruments have better net cash than the non hedgers. When they secure their operating costs or their freight rates, volatility is not a problem for these companies. The results of the empirical analysis are presented in table 5. The regressions outcome both for hedgers and non hedgers, as well as for all sample consist independent variables values. Hedge dummy used to measure derivatives impact on firms value is also presented. In Panel A regressions results for firms using hedging tools verify that these firms value higher. Hedge dummys coefficient is 0.778 and represents a positive and significant impact on firms value. So, there is a great premium for firms which use any kind of derivatives. Regarding the other two independent variables, net debt has a positive impact on their value, but net cash affects them negatively. Higher debts level seems not to be a great issue for hedgers, even though the difference with the

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non hedgers is huge. Both results for net cash and net debt are not significant which means that analysis is not able to give us safe results. On the other hand, Panel B presents regressions results for firms which do not use any hedging tools. This category is characterized by a negative impact on firms value from net debts and a positive one from their net cash. Furthermore, significance level is low and the impact of the independent variables is not ensured that it is true, both for hedgers and non hedgers. Panel C provides evidence that firms net debt is a crucial factor with a negative impact on firms value, but this is also a non significant result. Positive but still non significant is net cash impact. Results are in line with many of the previous studies. Hedging as a factor for additional firm value found to be significant positive. Similar studies confirm positive impact on firms value [Allayanis and Weston (2001); Bartram et al. (2003); Allayannis et al. (2003); Carter et al. (2004); Hagelin et al. (2004);]. Premiums on firm value found to be significant and vary between 0.09 and 0.172. According to above mentioned authors, independent variables and time horizon vary per study. This study apart from hedging usage, adopts two other basic parameters for firms value, the net debt and the net cash. Even though, this is a very simple model as there are many other variables which might influence firms value, net cash and net debt give a prompt view for firms value.

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Table 4

Summary Statistics Firms Using Derivatives (1) Firms Not Using Derivatives (2) Total Tobins Q Net Debt Net Cash Tobins Q Net Debt Net Cash Tobins Q Mean 2.159063 1185154 135280.7 1.735256 462604.7 67380.54 1.852168 Median 1.999375 1117653 120750.5 1.624524 395059.3 77147.41 1.727931 Maximum 3.58 1785099 207344.7 2.657143 932143.7 117481.5 2.911724 Minimum 1.285 690523.4 92276.83 0.96 142100.7 -2498.03 1.049655 Std. Dev. 0.681465 401988.9 50550.86 0.562641 295218.6 52751.85 0.59542 Skewness 0.204911 -0.01311 0.492405 -0.0163 0.15096 -0.05698 0.044725 Kurtosis 2.787292 2.534398 1.894016 2.445493 2.173636 1.59062 2.539782 Jarque-Bera 2.98265 4.383989 2.934883 1.205288 1.776494 2.309845 1.695594 Probability 0.458722 0.319785 0.239994 0.581923 0.497225 0.330358 0.547936

Net Debt 661928.7 594395.4 1167442 293389.7 324672.5 0.1057 2.273157 2.495803 0.448276

Net Cash 86111.61 89175.86 142271.3 23646.76 52144.68 0.094571 1.674315 2.482269 0.30543

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Freight rates fell rapidly in mid 2008 reaching a record bottom of 664 units for BDI and shipping firms needed cash in order to pay their running obligations. Even though, bunker prices decreased too, firms liquidity is getting more important now. Turbulent economic periods need to be handled carefully. Shipping firms need to be proactive, otherwise their survival might be difficult.

Table 5 Regression Results Panel A - Firms Using Derivatives Variable Coefficient Std. Error t-Statistic Prob. Net Debt 0.132439 0.4462215 0.011026 0.444213 Net Cash -0.817393 0.553597 0.91682 0.2241 Hedge Dummy 0.777998 0.996940857 1.650253 0.324357 (R-squared=0.359357625, Adjusted R-squared=0.229212, Log Likelihood=1.612518) Panel B - Firms Not Using Derivatives Variable Coefficient Std. Error t-Statistic Prob. Net Debt -0.111066 0.349409095 0.3283 0.455686 Net Cash 0.369163 0.413940762 0.062402 0.339495 (R-squared=0.370825, Adjusted R-squared=0.183036, Log Likelihood=2.870596) Panel C - Total Sample Variable Coefficient Net Debt -0.043892 Net Cash 0.041838 Hedge Dummy 0.777998

Std. Error t-Statistic Prob. 0.376115966 0.240776 0.452521 0.452466621 0.20773 0.307662 0.996940857 1.650253 0.324357

(R-squared=0.367661, Adjusted R-squared=0.195774, Log Likelihood=2.52354)

6 Conclusions

This research aims to provide evidence that firms which use derivatives to manage their risk exposure adds financial value to them. Using Tobins Q as a proxy for firms value, studys findings support a significant positive impact. Higher firm value can be achieved by using risk management tools.

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Furthermore, taking into consideration last months drop on freight rates there are a lot of challenges for charterers. Despite shipowners desires, charterers may take advantage regarding freight rates. FFAs prices followed spot freight rates and dropped dramatically too. So, they can fix better futures contracts with shipowners and lock required freight levels. Results could be seen promptly as market made a correction after several months decrease. However, shipowners, who have enough cash flow, have the opportunity to invest now. Low vessels prices allow them to buy assets which might be anchored for the next months, but return money back in the near future. Many of the shipowners who invested to newbuilding vessels cancelled some of their orders because earnings seemed to be bad. Even though no one knows what will happen within the next few years, vessels prices is a challenge for owners to invest and take their money back.

Acknowledgements

Funding through a research grant from Propondis Foundation is gratefully acknowledged.

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Appendix

Graph 1 Bunkerwire Rotterdam 380cst HSFO

800 700 600 500 400 300 200 100 2004 2005 2006 2007 2008

Graph 2 Bunkerwire Rotterdam 180cst HSFO

800 700 600 500 400 300 200 100 2004 2005 2006 2007 2008

Graph 3 Bunkerwire Rotterdam MGO DMA

1400 1200 1000 800

Graph 4 ICE Brent

160 140 120 100 80

600 400 200 2004 2005 2006 2007 2008

60 40 20 2004 2005 2006 2007 2008

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Graph 5 Baltic Dry Index 12000 10000 8000 6000 4000 2000 0 86 88 90 92 94 96 98 00 02 04 06 08 Baltic Dry Index
Graph 6 BCI FFAs Cal09 140000 120000 100000 80000 60000 40000 20000 0 2008M04 2008M07 BCI FFAs 2008M10

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