Financial derivatives for risk management in shipping operations: A simulation model applied to the oil and gas sector

Abstract

The objective of the study is to demonstrate the utility of financial derivatives instruments in risk protection for logistics. In the specific case, we model the application of financial instruments to shipping operations in the oil and gas sector. We first identify all risks confronting actors in international shipping operations: exchange and interest rate fluctuations, and variations in freight and commodity prices. Next we provide a brief summary of three major types of financial derivatives contracts: futures, swaps and options. Finally, we apply numerical simulations to identify appropriate cover against financial risks through application of the derivatives instruments. The methodology serves as a guide to efficient and effective advance planning and management of risk. Companies can: i) measure risk parameters; ii) compare the projected performance of alternate financial tools for their reduction; iii) select the appropriate instruments on the basis of cost and benefit standards defined by the company.