Marine Finance Assignment Example | Topics and Well Written Essays - 1500 words

Marine Finance - Assignment Example Research – Mainly concerned with providing research work on marine industry. The Shipping Industry The shipping industry comprises of the largest marine sector. However there has been a decline in the shipping industry since 1974. This can be primarily attributed to cyclical developments which got worse with the structural changes in the shipping industry and the world trade that made adjustments a time consuming and complex process. The extreme changes in the revenues, cash flows and values of assets during the present financial crisis have bought in difficulties in the regular order of financing shipping companies. While bank loan will continue to be an important source of finance, the newly regulated environments are forcing the shipping banks to shift their risk from balance sheet to capital markets through instruments of loan securitization. Due to this shipping company will look for capital markets as a source of external debt. Risk management will be a key issue in the shipping companies under the current situation. The other changes witnessed by the shipping industry is that traditionally it was structured by function and performance but now it is undergoing drastic changes as traditional functions are now merged with number of other services. Another major change witnessed by the shipping industry is involvement of the government in its ownership, operation and regulation. Thus the shipping industry has evolved over time from traditionally being an owner operating, free trading, and unregulated industry towards a public oriented, highly regulated and institutionalised industry (Frankel, 1987, pp. 1-15). Role of Financial Management in Risk Mitigation of shipping Industry The shipping industry encounters a number of risk namely changes in equity prices, interest rates, exchange prices, commodity rates and the changing freight rates. The risk of the changing freight rates will be discussed at length in this section. This is a kind of marketing ris k the shipping industry faces on a regular basis. The freight rates historically have proved to be very volatile. The effect of unpredictable geo-political events and slow adjustment of supply to demand has resulted in drastic changes in the freight rates. In financial management the best used risk assessment model is the Value at-Risk Approach. It was developed by JP Morgan’s Chairman Dennis Weatherstone. In this approach he asked his staff to provide him with one page report on a daily basis popularly known as the â€Å"4:15 report† which indicates the risk and potential loss in the next 24 hours in the bank’s portfolio. The approach used the estimates of standard deviation and correlation between the returns of different traded equipments. General methodologies of estimating the Value at Risk Approach are analytical methods, Historical Simulation and Monte-Carlo Simulation. This very approach is used in the assessment of freight rate risk in shipping industry . This approach first considers freight rates as risk factors which are assumed to follow random walk and are modelled using stochastic processes. These stochastic processes reflect some of characteristics of freight rate dynamics. The cash flow forms the key measurement of risk. For