Risk Management and Real Option Harvard Case Solution & Analysis

Question 1.1
Ocean trans has settlement rate of $20,175. It contracts for two months June and July on average for 60 days. Because, the trip to china is about to 60 days, and forward freight agreement (FFA) average daily price per month for the June is $24,421, and for July is $25,453 per day. Meanwhile, the settlement periods are two, each of the period assumed to be 30 days long. So, if the Oceantrans enters into the contract of forward freight agreement it would incur payoffs as per the settlement rate, and daily average freight.
The settlement rate is $20,175, and the average daily freight for the June is $24,421 so Oceantrans has pay $24,421-$20,175=$4,246 daily that sums up an amount of $4,246*30=127,380, this is payoff for the month of June. (See Exhibit 1) Similarly, the average freight price for the month of July is $25,453, so the Oceantrans has pay $25,453-$20,175=$5,278 that sums up to $5,278*30=$158,340 payoff for the month of July. During the agreement, Oceantrans has to pay an amount of $285,720. See Exhibit 1
The Lock in price for the Oceantrans is$23,611 that should be settlement price for the Oceantrans given that it approached to the price that is undervalued. Because, there is higher volatility ofthe average daily freight price. The difference between the settlement price and lock in price is $3,436and this sums up to total amount of $3,436*30= $206,205. This difference amount could have been saved by the company, it would have locked the price of $23,611, and company would have to pay only an amount of $79,514. A huge amount of the payoff could have saved, if the settlement rate was appropriate. See Exhibit 2 for the lock in price calculations

Risk Management and Real Option Harvard Case Solution & Analysis

The pattern of the forward rate shows that there is consistent growth into the forward rates from June to December. Average growth rate during that period was 2% only. But, during period of the November and December no change was observed into the forward rate. Furthermore, the forward rate increases and decreases with consistency and with fixed pattern. For example the July and August has forward rate growth rate is either 4% or 3%. But, the significant pattern of the forward rate is that at the end of year there is no growth into the forward rate, and in next year’s quarter forward rate is declined by 12% which approximately to the spot rate of June. See Exhibit 3
The freight rates are increasing with a similar pattern of growth rate for example from June to December the Freight rates increased as 5%, 3%, 1%, 3%, 5%, and then 0%, 0%, and in first quarter of 2018 the freight rates declined by 16%, and it almost returns to the same freight as in June but with insignificant difference. So, it can be determined that freight rates are very volatile, but rates are increasing and decreasing in a growth pattern. See Exhibit 4.
Denofa is largest importer of the soy beans from the Brazil. Because, the Brazil is one largest producer of the soy beans worldwide. It also produces soy beans without genetically modifying it..........

This is just a sample partical work. Please place the order on the website to get your own originally done case solution.

Share This


Save Up To




Register now and save up to 30%.