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Time Charters with Purchase Options in Shipping: Valuation and Risk Management

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Author Info
Jørgensen, Peter Løchte () (Department of Business Studies, Aarhus School of Business)
De Giovanni, Domenico (Department of Business Studies, Aarhus School of Business)
Abstract

The paper studies the valuation and optimal management of Time Charters with Purchase Options (T/C-POPs) which is a specific type of asset lease with embedded options that is common in shipping markets. T/C-POPs are economically significant and sometimes account for more than half of the stock market value of listed shipping companies. The main source of risk in markets for maritime transportation is the freight rate, and we therefore specify a single-factor continuous time model for the dynamic evolution of freight rates which allows us to price a wide variety of freight rate related derivatives including various forms of T/C-POPs using contingent claims valuation techniques. Our model allows for the derivation of closed valuation formulas for some simple freight rate derivatives while the more complex ones are analyzed using numerical (finite difference) procedures. We accompany our theoretical results with illustrative numerical examples as we proceed

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Paper provided by University of Aarhus, Aarhus School of Business, Department of Business Studies in its series Finance Research Group Working Papers with number F-2008-05.

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Length: 47 pages
Date of creation: 06 Oct 2008
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Handle: RePEc:hhb:aarbfi:2008-05

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Keywords: ship valuation; options on ships; leasing; lease contracts with options; optimal stopping;

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  5. Jan Bartholdy & Dennis Olson & Paula Peare, 2007. "Conducting Event Studies on a Small Stock Exchange," European Journal of Finance, Taylor and Francis Journals, vol. 13(3), pages 227-252. [Downloadable!] (restricted)
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  6. Consiglio, Andrea & De Giovanni, Domenico, 2007. "Pricing the Option to Surrender in Incomplete Markets," Finance Research Group Working Papers F-2007-02, University of Aarhus, Aarhus School of Business, Department of Business Studies. [Downloadable!]
  7. Bartholdy, Jan & Mateus, Cesário, 2006. "Debt and Taxes: Evidence from bank-financed unlisted firms," Finance Research Group Working Papers F-2006-02, University of Aarhus, Aarhus School of Business, Department of Business Studies. [Downloadable!]
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  9. Christiansen, Charlotte & Joensen, Juanna Schröter & Rangvid, Jesper, 2005. "Do More Economists Hold Stocks?," Finance Research Group Working Papers F-2005-02, University of Aarhus, Aarhus School of Business, Department of Business Studies. [Downloadable!]
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  10. Alesii, Giuseppe, 2005. "VaR in real options analysis," Review of Financial Economics, Elsevier, vol. 14(3-4), pages 189-208. [Downloadable!] (restricted)
  11. Roar Adland & Steen Koekebakker, 2007. "Ship Valuation Using Cross-Sectional Sales Data: A Multivariate Non-Parametric Approach," Maritime Economics and Logistics, Palgrave Macmillan Journals, vol. 9(2), pages 105-118, June. [Downloadable!] (restricted)
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