MARGIN ACCOUNTS, DERIVATIVES AND FAIR VALUE MEASURES

Margin Accounts

During December 31, 2019 and 2018, the Company was party to forward freight agreements and fuel swap contracts in order to mitigate the risk associated with volatile freight rates and fuel prices. Under the terms of these contracts, the Company is required to deposit funds in margin accounts if the market value of the hedged item declines. The Company had approximately $269,000 and $1,821,000 on deposit in two margin accounts at December 31, 2019 and at December 31, 2018, respectively. The funds are required to remain in margin accounts as collateral until the market value of the items being hedged return to preset limits. The margin accounts are included in advance hire, prepaid expenses and other current assets in the consolidated balance sheets at December 31, 2019 and 2018.

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. In 2019 and 2018, the Company entered into various fuel swap contracts that were not designated for hedge accounting. The aggregate fair value of these fuel swaps at December 31, 2019 and 2018 are liabilities of approximately $322,000 and $3,166,000, respectively, which are included in other current liabilities on the consolidated balance sheets. The change in the aggregate fair value of the fuel swaps during the years ended December 31, 2019 and 2018 resulted in a gain of approximately $2,844,000 and a loss of approximately $3,543,000, respectively, which are included in unrealized gain (loss) on derivative instruments in the accompanying consolidated statements of income.

Forward Freight Agreements

The Company assesses risk associated with fluctuating future freight rates and, when appropriate, actively hedges identified economic risk related to long-term cargo contracts with FFAs. The usage of such derivatives can lead to fluctuations in the Company’s reported results from operations on a period-to-period basis. During the year ended December 31, 2019 and 2018, the Company entered into FFAs that were not designated for hedge accounting. The aggregate fair value of these FFAs at December 31, 2019 and 2018 were liabilities of approximately $150,000 and $60,000, respectively. The change in the aggregate fair value of the FFAs during the years ended December 31, 2019 and 2018 resulted in a loss of approximately $90,000 and $326,000, respectively, which are included in unrealized gain/(loss) on derivative instruments in the accompanying consolidated statements of income.

Fair Value Hierarchy

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

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

Level 2 – observable inputs other than quoted prices in active markets for identical assets and liabilities

Level 3 – unobservable inputs in which there is little or no market data available, which require the reporting entity to develop its own assumptions



	Balance at December 31, 2019			Level 1		Level 2			Level 3
Margin accounts	$	269,379		$	269,379	$	—		$	—
Fuel swap contracts	$	(322,313	)	$	—	$	(322,313	)	$	—
Forward freight agreements	$	(149,760	)	$	—	$	(149,760	)	$	—



	Balance at December 31, 2018			Level 1		Level 2			Level 3
Margin accounts	$	1,820,657		$	1,820,657	$	—		$	—
Fuel swap contracts	$	(3,165,967	)	$	—	$	(3,165,967	)	$	—
Forward freight agreements	$	(59,940	)	$	—	$	(59,940	)	$	—

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. Such quotes represent the estimated amounts the Company would receive to terminate the contracts.