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

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  • 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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Bibliographic Info

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
Date of revision:
Handle: RePEc:hhb:aarbfi:2008-05

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Postal: The Aarhus School of Business, Fuglesangs Allé 4, DK-8210 Aarhus V, Denmark
Fax: + 45 86 15 19 43
Web page: http://www.asb.dk/about/departments/bs.aspx
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Related research

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

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  1. Goldenberg, David H., 1991. "A unified method for pricing options on diffusion processes," Journal of Financial Economics, Elsevier, vol. 29(1), pages 3-34, March.
  2. Christiansen, Charlotte, 2008. "Level-ARCH short rate models with regime switching: Bivariate modeling of US and European short rates," International Review of Financial Analysis, Elsevier, vol. 17(5), pages 925-948, December.
  3. Andrea Consiglio & Domenico De Giovanni, 2010. "Pricing the Option to Surrender in Incomplete Markets," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 77(4), pages 935-957.
  4. Charlotte Christiansen & Juanna Shröter Joensen & Jesper Rangvid, 2005. "Do More Economists Hold Stocks?," Economics Working Papers 2005-06, School of Economics and Management, University of Aarhus.
  5. Trigeorgis, Lenos, 1996. "Evaluating leases with complex operating options," European Journal of Operational Research, Elsevier, vol. 91(2), pages 315-329, June.
  6. Jan Bartholdy & Dennis Olson & Paula Peare, 2007. "Conducting Event Studies on a Small Stock Exchange," The European Journal of Finance, Taylor & Francis Journals, vol. 13(3), pages 227-252.
  7. Jostein Tvedt†, 1997. "Valuation of VLCCs under income uncertainty," Maritime Policy & Management, Taylor & Francis Journals, vol. 24(2), pages 159-174, January.
  8. David C. Porter & Carsten Tanggaard & Daniel G. Weaver & Wei Yu, 2008. "Dispersed Trading and the Prevention of Market Failure: the Case of the Copenhagen Stock Exchange," European Financial Management, European Financial Management Association, vol. 14(2), pages 243-267.
  9. 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.
  10. Roar Adland & Steen Koekebakker, 2007. "Ship Valuation Using Cross-Sectional Sales Data: A Multivariate Non-Parametric Approach," Maritime Economics and Logistics, Palgrave Macmillan, vol. 9(2), pages 105-118, June.
  11. Alesii, Giuseppe, 2005. "VaR in real options analysis," Review of Financial Economics, Elsevier, vol. 14(3-4), pages 189-208.
  12. Christiansen, Charlotte & Ranaldo, Angelo, 2005. "Realized Bond-Stock Correlation: Macroeconomic Announcement Effects," Finance Research Group Working Papers F-2005-05, University of Aarhus, Aarhus School of Business, Department of Business Studies.
  13. McConnell, John J. & Schallheim, James S., 1983. "Valuation of asset leasing contracts," Journal of Financial Economics, Elsevier, vol. 12(2), pages 237-261, August.
  14. Anand, Amber & Tanggaard, Carsten & Weaver, Daniel G., 2009. "Paying for Market Quality," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 44(06), pages 1427-1457, December.
  15. Vasicek, Oldrich, 1977. "An equilibrium characterization of the term structure," Journal of Financial Economics, Elsevier, vol. 5(2), pages 177-188, November.
  16. Adland, Roar & Cullinane, Kevin, 2006. "The non-linear dynamics of spot freight rates in tanker markets," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 42(3), pages 211-224, May.
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