Title: "Time Charters with Purchase Options in the Shipping Business: Valuation and Risk Management"
Abstract: "Maritime derivatives like options on freight rates are growing in importance in international shipping markets. A type of option of particular importance in these markets is the socalled TCpop - the Time Charter purchase option. It has become quite common that operators of vessels lease their ships - sometimes directly out of the shipyards - for a certain period of time for an agreed upon daily rate, eg. US$25.000 per day, but with an added option to buy the underlying ship for a fixed price at some future date, say after 10 years. For shipping firms that have preferred to lease their fleet in this or a similar way in recent years these options have turned out to be extremely valuable as freight rates and thus prices of ships have skyrocketed.
The economic significance of the TCpops stresses the need for good models to value them and to assist in the general process of risk management within the shippnig firm. This paper is about developing and to the extent possible testing a model for valuation of TCpops. From interviews with risk managers we know that the models currently in use are not very well developed. In other words, what is currently used are adapted versions of the Black-Scholes model and formula where attempts are made to model directly the dynamics of the underlying variable - the value of the ship.
However, as the underlying ship value is affected by many significant factors such as freight rates in the relevant market, the dollar (and Yen) exchange rates, the oil price, and the level(s) of interest rate(s) we will develop not only a more advanced factor model that can be calibrated to a lot of good data, but also a model (and associated numerical implementation schemes) that can take another specific feature of the TCpops into account, namely their American/Bermudan exercise features. The Black-Scholes formula is likely to be too restrictive on this point."
The seminar will take place in G-building, see below for the address.