Since 2000, due to the rapid growth of global trade, China has become the largest demand economy for shipping in the world. The development of shipbuilding industry is particularly excellent. Ship orders, construction volume and undelivered orders are among the highest in the world. The shipping industry has also formed a modernized fleet of large, specialized and younger scales in the world’s top three, a number of world-class ports, and the international status of China’s shipping companies has further improved. As the shipping industry is a highly capital-intensive industry, the resulting ship financing needs are strong and growing. However, with the impact of the financial crisis in 2008, the shipping industry has experienced tremendous fluctuations and continued to slump, the traditional ship financing model based on bank loans has been greatly affected, and the new type of ship financing leasing model has developed rapidly. Because of its unique advantages such as small financial pressure and flexible operation, besides, it actively assists shipping companies with difficulties in general management to alleviate the difficulty of financing, and the new type of ship financing leasing gains recognition and choice from China’s shipping market gradually, becoming the second largest financing channel after bank loans. China’s ships leasing companies invested $11.5 billion in the shipping industry in 2016.
The ship financing leasing refers to the lessor (lease company) signing a lease contract with the lessee and signing a sales contract with the shipyard according to the choice of the lessee (shipping company) for the shipyard and the leased subject matter (ship). Ship financing leasing is a model that the lessor provides the ship with the charterer and the lessee pays rent to the lessor during the lease term. The existing research on the financing leasing model of ships is quite rich, but the research about risk management and pricing of ship financing leasing is lacking, and further research is needed. Especially in recent years, the depression in the shipping industry has led to the financial contraction of shipping companies and the tight capital chain. Based on the interest rate swaps, both sides of the industry’s ship finance leasing institutions, draws on the range accrual interest swap that connect certain indexes creativity, replicates and innovates the existing ship financing leasing interest rate swaps, and forms a new model for range accrual swap that connect the shipping index in order to ease the financial pressure on financial leasing, circumvent or transfer the comprehensive risks of ship financing leases. For this kind of innovative practice about the range accrual swap in the connection shipping index, there is no relevant literature for research. This paper intends to combine the shipping finance leasing business innovation of the shipping industry, establish the theory and model of the BDI index linked ship finance leasing range accrual interest swap, and provide decision-making reference for the new model practice of ship financing leasing risk management.
Range accrual swap is a typical derivative of standard interest rate swaps. Two counterparties exchange cash flows at predetermined times. Cash flow swaps are based on underlying assets such as interest rates, equity, exchange rates, or commodities, even the fields of meteorology. The range accrual swap that connects the BDI index is a swap product linked to the BDI index range. The floating payment interest rate is related to the length of the breakthrough (or entry) index range, which can better avoid the shipping market risks faced by the two parties in the ship finance leasing project. For the ship finance leasing lessee who is the fixed rate payer, BDI index linked ship finance leasing range accrual interest swap, is equivalent to purchasing BDI index insurance or put option. When the shipping index is below a certain level, the lessee will obtain a certain amount of reverse indemnity from the lender, who is the payer of the floating rate, thereby achieving the effect of hedging, relieving cash flow pressure, smoothing the finance, and effectively ensuring that the ship financing leasing party can continue to perform the lease contract.
This study conducts an in-depth analysis of the innovate business of shipping companies about range accrual swap, discusses the new model of the BDI index linked ship finance leasing range accrual interest swap, and the pricing problem of interest rate swaps is studied. Compared with the existing domestic and foreign literature: on the one hand, the existing ship financing leasing model theory has been upgraded and deepened; on the other hand, the model of BDI index linked ship finance leasing range accrual interest swap is more practical and applicable than the existing ship finance lease pricing model, which can alleviate the cash flow pressure and achieve the purpose of fulfilling the business. There are three main contributions to this research:
First, this paper theoretically explores the theory of BDI index linked ship finance leasing range accrual interest swap. Based on the analysis of the essential characteristics of the model, the interest rate swap theory and the no-arbitrage strategy are used to determine the pricing principle of the BDI index linked ship finance leasing range accrual interest swap.
Second, this paper constructs a model of BDI index linked ship finance leasing range accrual interest swap. By means of the stochastic process method, the double stochastic scenarios of BDI index and interest rate trend are described, and the model of BDI index linked ship finance leasing range accrual interest swap is established. At the same time, the Monte Carlo simulation method is used to give the model solving steps, and make model results more in line with actual pricing decisions.
Third, this paper uses an example to carry out verification. Solve and validate the case of BDI index linked ship finance leasing range accrual interest swap, and analyze the relationship between various parameters and decision variables (BDI index critical value, real interest rate, nominal interest rate, and interest differentials) by means of scenario analysis. The results show that the model of BDI index linked ship finance leasing range accrual interest swap established in this paper has better reliability and is closer to the actual situation.
It should be pointed out that this paper discusses the pricing of the BDI index linked ship finance leasing range accrual interest swap, but, the credit risk and operational risk of the lessee have not been included in the model, and these aspects needs to be further studied.