Note 2 - Risk management (continued)

Credit risk

The Company’s credit risk primarily comprises freight receivables, prepayments to shipyards on newbuildings, cash deposits in bank accounts, forward sales of foreign currencies, bunker hedging contracts and forward freight agreements.

These items are included in the balance sheet at amounts corresponding to the maximum credit risk as of the balance sheet date and amount to USD 1,047 million (USD 491 million).

The Company’s credit risks are limited. Financial instruments and commodity instruments are only entered into with major, recognised banks with a high credit rating and with large, wellknown, reputable partners with an adequate credit rating and a good equity ratio.

The risk on customers is limited by such measures as systematic assessment of customers’ credit rating and reputation and limits as to the size and duration of the Company’s engagements with new, unknown customers.

The Company’s cash deposits are placed exclusively with large, recognised banks with a credit rating of at least A+ (Moody’s) or the equivalent and meeting the solvency requirements of the Danish Financial Supervisory Authority.

Other price risks

FFAs (forward freight agreements)

The Company uses the FFA market to cover future physical positions.

At the end of 2007, the Company had bought FFAs with a contractual value of USD 84 million (sold USD 35 million).

All other things being equal, a 10% decrease in the market price of the FFAs entered into by the Group at the end of 2007 for the purpose of covering physical positions would affect the Company’s financial performance negatively by USD 8 million before tax.

In addition to this coverage activity, the Company sees a potential in using its knowledge of the market to take more controlled positions in the FFA market, independently of the Company’s portfolio of vessels.

This activity is handled by the company NORDEN Derivatives A/S, which is a wholly owned subsidiary of the Company.

The activity is controlled within clearly defined limits which, among other things, mean that:

Contracts may only be entered into in the Panamax and Handymax segments.
Individual contracts may not exceed 6 months’ duration.
The expiry date of the contracts must be within the coming twelve months.
The maximum net risk may not exceed 36 months.
The maximum net risk with individual counterparties may not exceed 24 months.
The company has introduced a stop/loss strategy.

At the end of 2007, NORDEN Derivatives A/S had bought FFAs with a contract value of approximately USD 9 million net (USD 8 million) up to and including 2008.

Bunker hedging contracts

The Company hedges its expected future bunker (fuel for the vessels) requirements to eliminate the risk of future oil price fluctuations. The Company uses so-called bunker hedging contracts, which lock in the price of the part of the bunker requirement related to loading contracts for a fixed period. At the end of 2007, NORDEN had purchased bunker hedging contracts for USD 168 million covering the period 2008-2012 (USD 66 million).

All other things being equal, a 10% decrease in bunker hedging contracts entered into at the end of 2007 would affect the Company’s financial performance negatively by USD 20 million before tax.

For further information, see note 39 ”Financial instruments”.

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