Research On Ship Financing Risk Management Based On Interest Rate Swaps

Baltic Dry Index (BDI) bottomed out in the second half of2008,marking the world shipping market, the arrival of winter. With the sharp decline in freight, many shipping companies or negative earnings are hovering around breakeven point. A large number of old vessels to enter the ship dismantling industry, second-hand ship market trading bleak, sharp decline in new shipbuilding orders, shipping companies and shipyards are facing serious difficulties ship financing. The shipping industry itself has highly capital-intensive properties, leading to vessel operators need to invest a lot of capital, and the ship has a longer period of return on investment, the ship owners hardly has capital for freedom operation, ship financing so most capital loans from commercial banks. Because of a large amount of money, such loans will face risks arising from fluctuations in interest rates.On the basis of the researches at home and abroad, this paper puts forward how to use interest rate swaps to hedge the risks of ship financing. This paper analyzes the present situation and characteristics of ship financing, and expounds ship financing risk, in the form of classification and risk factors. This paper analyzes the ship financing risks of shipping companies and the financing risk analysis and measuring methods, and studies the ship financing risk evaluation theory. Then, this paper analyzed the nature of ship financing with data and studied operation mechanisms of fixed rate loans and floating rate loans indicating that floating rate loans has risks of interest rate fluctuation. Reducing these risks needs the aid of derivatives. First of all, analyzing the methods that are commonly used in the international to manage financing risks, the concept and operating principles of FRA, and explain its limitations. Then the author proposed an idea of solving the ship financing risks with interest rate swaps. Through the introduction of these concepts and theoretical knowledge of the researches, the introduction of interest rate swap pricing model, this paper illustrates the "fixed interest rate of fixed interest rate swap pricing "and" floating interest rate on a floating interest rate swap pricing" respectively and further expound them with examples. Finally it introduces the financing risk prevention and management of shipping companies, and puts forward suggestions and countermeasures for the business of Chinese companies. Therefore, ship financing participants can try to use interest rate swaps to hedge the risks and control risks that brought by the fluctuating interest rates in the minimum range, with lower cost and gain more profit. This is a problem that every shipping company will have to face up in the near future for the company’s sustainable development.