Pricing Freight Rate Options

In this paper the authors set up the theoretical framework for the valuation of the Asian-style options traded in the freight derivatives market. Assuming lognormal spot freight dynamics, they show that Forward Freight Agreements (FFA) are also lognormal prior to the settlement period, but that this lognormality subsequently breaks down. The authors suggest approximate dynamics in the settlement period for the FFA that leads to closed-form option pricing formulas for Asian call and put options written on the spot freight rate indices in the Black [Black, F., 1976. The pricing of commodity contracts. Journal of Financial Economics 3, 167-179] framework. In a Monte Carlo experiment the authors show that their formula gives very accurate prices, in particular for forward-starting freight options.

• Record URL:
  http://www.sciencedirect.com/science/article/B6VHF-4K9C6WG-1/2/cfaab2ebcd8d7dc02f3e3eb98dc85e3f
• Availability:
  • Find a library where document is available. Order URL: http://worldcat.org/issn/13665545
• Supplemental Notes:
  • Abstract reprinted with permission from Elsevier
• Authors:
  • Koekebakker, Steen
  • Adland, Roar
  • Sodal, Sigbjorn
• Publication Date: 2007-9

Language

• English

Media Info

• Media Type: Print
• Features: Appendices; Figures; References; Tables;
• Pagination: pp 535-548
• Serial:
  • Transportation Research Part E: Logistics and Transportation Review
  • Volume: 43
  • Issue Number: 5
  • Publisher: Elsevier
  • ISSN: 1366-5545
  • Serial URL: http://www.sciencedirect.com/science/journal/13665545

Subject/Index Terms

• TRT Terms: Bulk cargo handling; Freight service; Monte Carlo method; Prices; Pricing; Rates; Risk management; Securities; Shipping; Theory; Valuation
• Uncontrolled Terms: Forward freight agreements; Freight rates; Lognormal distribution; Option pricing; Options
• Subject Areas: Administration and Management; Finance; Freight Transportation; Marine Transportation;

Filing Info

• Accession Number: 01055947
• Record Type: Publication
• Files: TRIS
• Created Date: Jul 30 2007 2:09PM