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Freight options: Price modelling and empirical analysis

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  • Nomikos, Nikos K.
  • Kyriakou, Ioannis
  • Papapostolou, Nikos C.
  • Pouliasis, Panos K.

Abstract

This paper discusses an extension of the traditional lognormal representation for the risk neutral spot freight rate dynamics to a diffusion model overlaid with jumps of random magnitude and arrival. Then, we develop a valuation framework for options on the average spot freight rate, which are commonly traded in the freight derivatives market. By exploiting the computational efficiency of the proposed pricing scheme, we calibrate the jump diffusion model using market quotes of options on the trip-charter route average Baltic Capesize, Panamax and Supramax Indices. We show that the jump-extended setting yields important model improvements over the basic lognormal setting.

Suggested Citation

  • Nomikos, Nikos K. & Kyriakou, Ioannis & Papapostolou, Nikos C. & Pouliasis, Panos K., 2013. "Freight options: Price modelling and empirical analysis," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 51(C), pages 82-94.
    • Handle: RePEc:eee:transe:v:51:y:2013:i:c:p:82-94
    DOI: 10.1016/j.tre.2012.12.001
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    9. Lourdes Gómez-Valle & Julia Martínez-Rodríguez, 2021. "Including Jumps in the Stochastic Valuation of Freight Derivatives," Mathematics, MDPI, vol. 9(2), pages 1-17, January.
    10. Alexandridis, G. & Sahoo, S. & Visvikis, I., 2017. "Economic information transmissions and liquidity between shipping markets: New evidence from freight derivatives," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 98(C), pages 82-104.
    11. Lourdes Gómez-Valle & Miguel Angel López-Marcos & Julia Martínez-Rodríguez, 2020. "Two New Strategies for Pricing Freight Options by Means of a Valuation PDE and by Functional Bounds," Mathematics, MDPI, vol. 8(4), pages 1-12, April.
    12. Adland, Roar & Alizadeh, Amir H., 2018. "Explaining price differences between physical and derivative freight contracts," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 118(C), pages 20-33.
    13. Zhong, Huiling & Zhang, Fa & Gu, Yimiao, 2021. "A Stackelberg game based two-stage framework to make decisions of freight rate for container shipping lines in the emerging blockchain-based market," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 149(C).
    14. Lourdes Gómez‐Valle & Ioannis Kyriakou & Julia Martínez‐Rodríguez & Nikos K. Nomikos, 2021. "Estimating risk‐neutral freight rate dynamics: A nonparametric approach," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 41(11), pages 1824-1842, November.
    15. Tvedt, Jostein, 2019. "Transport services and the valuation of flexibility over business cycles," Transportation Research Part A: Policy and Practice, Elsevier, vol. 130(C), pages 517-528.
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    17. Vafa Arani, Hamed & Rabbani, Masoud & Rafiei, Hamed, 2016. "A revenue-sharing option contract toward coordination of supply chains," International Journal of Production Economics, Elsevier, vol. 178(C), pages 42-56.
    18. Fred Espen Benth & Steen Koekebakker, 2016. "Stochastic modeling of Supramax spot and forward freight rates," Maritime Economics & Logistics, Palgrave Macmillan;International Association of Maritime Economists (IAME), vol. 18(4), pages 391-413, December.
    19. Liu, Shuai & Hua, Guowei & Cheng, T.C.E. & Dong, Jingxin, 2021. "Unmanned vehicle distribution capacity sharing with demand surge under option contracts," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 149(C).

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