Credit Risk Measurement and Management in Shipping

Abstract

One of the most important types of risk to which market practitioners in shipping are exposed is credit risk. Credit risk arises because most of the deals, trades and contracts in shipping are on a principal-to-principal basis, which means that two parties agree to do business with each other and rely on each other’s ability to honour the agreement. The agreement could be a simple charter contract between a shipowner and a charterer, a newbuilding contact between an investor and a shipyard, or even a bunker transaction between a shipowner and a bunker supplier. In any case, parties to contracts can be exposed to each other’s ability to perform the contract, or to credit risk.