Valuation of freight transportation contracts under uncertainty |
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| Authors: | Mei-Ting Tsai Jean-Daniel Saphores Amelia Regan |
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| Affiliation: | aDepartment of Business Administration, National Chung Hsing University, Taichung 40227, Taiwan;bDepartment of Civil & Environmental Engineering, Institute of Transportation Studies, University of California, Irvine, CA 92697, USA;cDepartment of Economics, University of California, Irvine, CA 92697, USA;dDepartment of Planning, Policy and Design, University of California, Irvine, CA 92697, USA;eDepartment of Computer Science and Institute of Transportation Studies, University of California, Irvine, CA 92697, USA |
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| Abstract: | This paper applies concepts from the theory of Real Options to hedge uncertainty in transportation capacity and cost using derivative contracts, called truckload options. We make three contributions. First, we provide a closed-form pricing formula for basic truckload options when the truckload spot price on a given lane follows a simple mean-reverting process. Second, since only monthly statistics about truckload spot prices are currently available, we provide an approach to estimate the parameters needed to value truckload options. Finally, a numerical illustration based on real data shows that truckload options could be valuable to both shippers and carriers. |
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| Keywords: | Truckload contract Option pricing Ornstein&ndash Uhlenbeck process Uncertainty Derivatives Spot market |
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