Hedging – A Risk Management Stategy

Risk is an inherent part of the shipping business, and risk management is indeed a critical part of any shipping company’s management strategy to maintain or improve profitability. This concept is not new or unique, but its application and more importantly the available tools for use in risk management in shipping have been in a process of evolution over the past twelve to fifteen years.

Before then, the most common way of “hedging” was to balance one’s position by taking the opposite side in the physical market. For example, if you had sold forward freight, the only manner to hedge your position was to buy (charter) physical freight to offset your forward freight sales. Prior to working in the shipping industry, my job, as a young grain merchant, was to buy grain on the local level from the producers. This was my first involvement in the process known as “hedging,” a process that I did not fully appreciate at the time. For example, we grain merchants collectively purchased grain from the producers, thereby creating a “long cash position”.

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