Question

A charterer is interested in transporting coal to continental Europe around the middle of July. In order to protect himself from adverse freight movements, which may occur by the day of the physical fixture the charterer decides to use FFA contracts. At the beginning of June he enters into a Q3 FFA contract which works as a strip of three monthly FFAs. Currently the trip charter contract for route BPI P4 trades at $11,800/day and the Q3 BPI P4 FFA at 12,200/day.

At the end of June he fixes a contract in the physical market at a freight rate of $16,800 with duration of 90 days.

Once he secures the trip in the physical market he decides to unwind the hedge for Q3. At this date the settlement rates are $11,900/day for July, $12,000/day for August, $12,800/day for September.

a) Explain the rationale behind the strategy followed by the charterer.

b) Calculate the profit/loss from the FFA position for the charterer.

c) Calculate the hedged total cost for the charterer.

d) What would be the net cost after transaction costs (broker’s fees)? Comment.

e) Compare the hedged total cost of the charterer in the two scenarios. Discuss if the strategy in Scenario 2 was a good idea.

Answer 1

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No ¨

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes ¨ No x

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer x

Accelerated filer ¨

Non-accelerated filer ¨ (Do not check if a smaller reporting company)

Smaller reporting company ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

The aggregate market value of the Common Stock held by non-affiliates of the registrant on June 30, 2009, the last business day of the registrant’s most recently completed second quarter, was $797,137,960, based on the closing price of $34.04 per share on the New York Stock Exchange on that date. (For this purpose, all outstanding shares of Common Stock have been considered held by non-affiliates, other than the shares beneficially owned by directors, officers and certain 5% shareholders of the registrant; certain of such persons disclaim that they are affiliates of the registrant.)