Freight options: Price modelling and empirical analysis |
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| Institution: | 1. Department of Mechanical Engineering, Colorado School of Mines, 1500 Illinois St., Golden, CO, United States;2. Department of Mechanical Engineering, Clemson University, 206 Fluor Daniel EIB, Clemson, SC, United States;3. RungePincockMinarco, 500 S. Union Blvd., Lakewood, CO, United States;1. Athens University of Economics and Business, Department of Accounting and Finance, 76 Patission St, TK 104 34 Athens, Greece;2. World Maritime University, PO Box 500, SE-201 24 Malmö, Sweden;1. ICMA Centre, Henley Business School, University of Reading, Whiteknights, Reading RG6 6BA, UK;2. Shipping and Port Management, World Maritime University, P.O. Box 500, SE 201 24 Malmö, Sweden;3. American University of Sharjah, School of Business Administration, P.O. Box 26666, Sharjah, United Arab Emirates;1. Department of Civil and Environmental Engineering, Rutgers, The State University of New Jersey, CoRE 606, 96 Frelinghuysen Road, Piscataway, NJ 08854-8018, United States;2. Rail Transportation Engineering, Penn State Altoona, Penn Building - RTE Suite, 216F, 1431 - 12th Avenue, Altoona, PA 16601, United States |
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| Abstract: | This paper discusses an extension of the traditional lognormal representation for the risk neutral spot freight rate dynamics to a diffusion model overlaid with jumps of random magnitude and arrival. Then, we develop a valuation framework for options on the average spot freight rate, which are commonly traded in the freight derivatives market. By exploiting the computational efficiency of the proposed pricing scheme, we calibrate the jump diffusion model using market quotes of options on the trip-charter route average Baltic Capesize, Panamax and Supramax Indices. We show that the jump-extended setting yields important model improvements over the basic lognormal setting. |
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