Note 5. Derivative Instruments and Fair Value Measurements

Interest-Rate Swaps

The Company has entered into interest rate swaps to effectively convert a portion of its debt from a floating to a fixed-rate basis. Under these swap contracts, exclusive of applicable margins, the Company will pay fixed rate interest and receive floating-rate interest amounts based on three-month LIBOR settings. The swaps are designated and qualify as cash flow hedges. The following table summarizes the interest rate swaps in place as of September 30, 2011 and December 31, 2010.

Notional Amount Outstanding – September 30, 2011		Notional Amount Outstanding – December 31, 2010		Fixed Rate			Maturity
$	144,700,000	$	144,700,000		3.580	%		10/2011
	9,162,500		9,162,500		3.515	%		10/2011
	3,405,174		3,405,174		3.550	%		10/2011
	17,050,000		17,050,000		3.160	%		11/2011
	25,048,118		25,048,118		4.740	%		12/2011
	36,752,038		36,752,038		5.225	%		08/2012
	81,500,000		81,500,000		3.895	%		01/2013
	84,800,000		84,800,000		3.900	%		09/2013
$	402,417,830	$	402,417,830

The Company records the fair value of the interest rate swaps as an asset or liability on its balance sheet. The effective portion of the swap is recorded in accumulated other comprehensive income. Accordingly, liabilities of $13,444,552 and $22,135,507 have been recorded in Fair value of derivative instruments in the Company's balance sheets as of September 30, 2011 and December 31, 2010.

Forward freight agreements (FFAs), bunker swaps and freight derivatives

The Company trades FFAs, bunker swaps and freight derivative options, with the objective to utilize these markets as economic hedging instruments that reduce the risk of specific vessels to changes in the freight market and or bunker costs. The Company's FFAs, bunker swaps and freight derivative options have not qualified for hedge accounting treatment. As of September 30, 2011, net amount of $505,647 have been recorded in Fair value of derivative instruments as current liability in the accompanying balance sheet.

No portion of the cash flow hedges shown below was ineffective during the year. The effect of cash flow hedging relationships on the balance sheet as of September 30, 2011 and the statement of operations for the year ended December 31, 2010 are as follows:

The effect of designated derivative instruments on the consolidated balance sheets:

	Amount of Loss Recognized in OCI on Derivative (Effective Portion)
Derivatives designated for cash flow hedging relationships	September 30, 2011		December 31, 2010


Interest rate swaps	$	(13,444,552)	$	(22,135,507)

Total	$	(13,444,552)	$	(22,135,507)

The effect of non-designated derivative instruments on statements of operations:

Derivatives not designated as hedging instruments		Amount of loss					Amount of loss
		Three Months Ended					Nine Months Ended
	Location of Loss Recognized	September 30, 2011			September 30, 2010		September 30, 2011			September 30, 2010
FFAs, bunker swaps, freight and bunker derivatives	Other expense	$	(1,333,482	)		-	$	(359,573	)		-
Total		$	(1,333,482	)		-	$	(359,573	)		-

Cash collateral Disclosures

The Company does not offset fair value amounts recognized for derivatives by the right to reclaim cash collateral or the obligation to return cash collateral. The amount of collateral to be posted are defined in the terms of respective master agreement executed with counterparties or exchanges and are required when agreed upon threshold limits are exceeded. At September 30, 2011, the Company's collateral related to its FFAs, bunker swaps and freight derivative transactions was $1,645,804 which is recorded in Restricted cash in the accompanying balance sheet. As of September 30, 2011, the Company had no outstanding amounts paid as collateral to derivative fair value positions.

Fair Value Measurements

The following methods and assumptions were used to estimate the fair value of each class of financial instrument:

Cash, cash equivalents and restricted cash-the carrying amounts reported in the consolidated balance sheet for interest-bearing deposits approximate their fair value due to their short-term nature thereof.

Debt-the carrying amounts of borrowings under the revolving credit agreement approximate their fair value, due to the variable interest rate nature thereof.

Interest rate swaps-the fair value of interest rate swaps (used for hedging purposes) is the estimated amount that the Company would receive or pay to terminate the swaps at the reporting date.

Forward freight agreements (FFAs)-the fair value of FFAs is determined based on quoted rates.

Freight and bunker derivative instruments-the fair value of freight and bunker derivative contracts is the estimated amount that the Company would receive or pay to terminate the option contracts at the reporting date.

Bunker swaps-the fair value of bunker swaps is the estimated amount that the Company would receive or pay to terminate the swaps at the reporting date.

The Company defines fair value, establishes a framework for measuring fair value and provides disclosures about fair value measurements. The fair value hierarchy for disclosure of fair value measurements is as follows:

Level 1 – Quoted prices in active markets for identical assets or liabilities

Level 2 – Quoted prices for similar assets and liabilities in active markets or inputs that are observable

Level 3 – Inputs that are unobservable (for example cash flow modeling inputs based on assumptions)

The following table summarizes assets and liabilities measured at fair value on a recurring basis at September 30, 2011:


	Level 1		Level 2		Level 3
Assets:
Forward freight agreements	$	24,475		-
Bunker swaps	$	1,000		-		-
Bunker derivative instruments		-	$	420,360		-

Liabilities:
Interest rate swaps		-	$	13,444,552		-
Forward freight agreements	$	201,175		-		-
Freight derivative instruments		-	$	92,987		-
Bunker swaps	$	458,480		-		-
Bunker derivative instruments		-	$	198,840		-