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

2010; Taylor & Francis; Volume: 17; Issue: 5 Linguagem: Inglês

10.1080/13504860903388008

1466-4313

Peter Løchte Jørgensen, Domenico De Giovanni,

Probability and Risk Models

Abstract The article 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 that 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, whereas the more complex ones are analysed using numerical (finite difference) procedures. We accompany our theoretical results with illustrative numerical examples as we proceed.