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

43 Pages Posted: 1 Feb 2009 Last revised: 24 Nov 2013

See all articles by Peter Løchte Jørgensen

Peter Løchte Jørgensen

University of Aarhus - Business and Social Sciences

Domenico DeGiovanni

Università degli Studi della Calabria; Aarhus University - School of Business and Social Sciences

Multiple version iconThere are 2 versions of this paper

Date Written: September 21, 2009

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.

Keywords: Ship valuation, options on ships, leasing, lease contracts with options, optimal stopping

JEL Classification: G12, G13

Suggested Citation

Jørgensen, Peter Løchte and DeGiovanni, Domenico and DeGiovanni, Domenico, Time Charters with Purchase Options in Shipping: Valuation and Risk Management (September 21, 2009). Available at SSRN: https://ssrn.com/abstract=1336131 or http://dx.doi.org/10.2139/ssrn.1336131

Peter Løchte Jørgensen (Contact Author)

University of Aarhus - Business and Social Sciences ( email )

Finance Research Group
Fuglesangs Allé 4
DK-8210 Aarhus, 8210
Denmark
+4587165117 (Phone)

HOME PAGE: http://pure.au.dk/portal/en/plj@econ.au.dk

Domenico DeGiovanni

Aarhus University - School of Business and Social Sciences ( email )

Nordre Ringgade 1
Aarhus C, DK-8000
Denmark

Università degli Studi della Calabria ( email )

Ponte Bucci, Cubo 3C
Rende, Cosenza 87036
Italy

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