Bunker Risk Analysis and Risk Management

Amir H. Alizadeh and Nikos K. Nomikos
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Amir H. Alizadeh: Cass Business School, City University
Nikos K. Nomikos: Cass Business School, City University

Chapter 10 in Shipping Derivatives and Risk Management, 2009, pp 338-362 from Palgrave Macmillan

Abstract: Abstract In general, ships use fuel oil (bunker) for propulsion, and diesel oil for manoeuvring in ports and for electricity generators. Fuel oil is essentially the ‘residual oil’ that was originally defined as whatever liquid was left behind in the petroleum distillation unit after the removal of more valuable products such as kerosene, diesel and naphtha (Percy, et al., 1996). There are two basic grades of bunker fuel, heavy fuel oil (HFO) 180 centistokes (cst) and the more widely used HFO 380 cst.1 Centistokes is the unit of measurement of fuel viscosity and the distinction between the two grades is the distillate content: Grade 180 cst has a 7 per cent to 15 per cent distillate content, while Grade 380 cst has 2 per cent to 5 per cent distillate content (Visweswaran, 2000). The higher the distillate content, the more energy the fuel has; 60 per cent of the world bunker trade is in HFO380cst while HFO180cst and other grades account for about 30 per cent, with the remaining 10 per cent of world trade being in marine diesel oil. Bunker fuel is also classified according to its sulphur content into low (1 per cent) and high (3.5 per cent) sulphur. Low-sulphur fuel oils are less corrosive and hence more expensive compared to high-sulphur fuels, even though the corrosion process caused by high-sulphur fuel can be counteracted by using special cylinder lubricants. Although recent technological advances have enabled ships to use lower-grade bunkers more efficiently, high-grade bunkers are still used by more sophisticated ships, especially cruise ships and fast ferries.

Keywords: Call Option; Strike Price; Physical Market; Fixed Price; Forward Contract (search for similar items in EconPapers)
Date: 2009
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DOI: 10.1057/9780230235809_10

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