Derivative Instruments and Fair Value Measurements

Forward freight agreements

The Company assesses risk associated with fluctuating future freight rates and, when appropriate, hedges identified economic risk with appropriate derivative instruments, specifically forward freight agreements (FFAs). These economic hedges do not usually qualify for hedge accounting under ASC 815 and as such, the usage of such derivatives can lead to fluctuations in the Company’s reported results from operations on a period-to-period basis. The aggregate fair value of FFAs at September 30, 2018 and December 31, 2017 were assets of approximately $3,000 and $266,000, which are included in other current assets on the consolidated balance sheets. The change in the aggregate fair value of the FFAs during the three months ended September 30, 2018 and 2017 are gains of approximately $9,000 and losses of approximately $379,000, respectively, which are included in unrealized gain (loss) on derivative instruments in the accompanying consolidated statements of operations. The change in the aggregate fair value of the FFAs during the nine months ended September 30, 2018 and 2017 are a loss of approximately $263,000 and a gain of approximately $1,075,000, respectively, which are included in unrealized gain (loss) on derivative instruments in the accompanying consolidated statements of operations.

Fuel Swap Contracts

The Company continuously monitors the market volatility associated with bunker prices and seeks to reduce the risk of such volatility through a bunker hedging program. During 2018 and 2017, the Company entered into fuel swap contracts that were not designated for hedge accounting. The aggregate fair value of these fuel swaps at September 30, 2018 and December 31, 2017 are assets of approximately $1,118,000 and $377,000, respectively, which are included in other current assets on the consolidated balance sheets. The change in the aggregate fair value of the fuel swaps during the three months ended September 30, 2018 and 2017 are gains of approximately $495,000 and $319,000, respectively, which are included in unrealized gain (loss) on derivative instruments in the accompanying consolidated statements of operations. The change in the aggregate fair value of the fuel swaps during the nine months ended September 30, 2018 and 2017 are gains of approximately $740,000 and losses of approximately $265,000, respectively, which are included in unrealized gain (loss) on derivative instruments in the accompanying consolidated statements of operations.

The three levels of the fair value hierarchy established by ASC 820, Fair Value Measurements and Disclosures, in order of priority are as follows:

Level 1 – Quoted prices in active markets for identical assets or liabilities. Our Level 1 fair value measurements include cash, money-market accounts and restricted cash accounts.

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, 2018 and December 31, 2017:



	Balance at
	September 30, 2018		Level 1		Level 2		Level 3
	(unaudited)
Margin accounts	$	384,168	$	384,168	$	—	$	—
Fuel swaps	$	1,117,609	$	—	$	1,117,609	$	—
Freight forward agreements	$	2,940	$	—	$	2,940	$	—



	Balance at December 31, 2017		Level 1		Level 2		Level 3
Margin accounts	$	912,981	$	912,981	$	—	$	—
Fuel swaps	$	377,273	$	—	$	377,273	$	—
Freight forward agreements	$	265,768	$	—	$	265,768	$	—

The estimated fair values of the Company’s forward freight agreements and fuel swap contracts are based on market prices obtained from an independent third-party valuation specialist based on published indexes. Such quotes represent the estimated amounts the Company would receive or pay to terminate the contracts.