Freight options: Price modelling and empirical analysis

Nikos K. Nomikos, Ioannis Kyriakou, Nikos Papapostolou () and Panos Pouliasis

Transportation Research Part E: Logistics and Transportation Review, 2013, vol. 51, issue C, 82-94

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.

Keywords: Shipping; Spot freight rates; Jump diffusion model; Forward start average options; Freight option price model (search for similar items in EconPapers)
Date: 2013
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Citations: View citations in EconPapers (21)

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DOI: 10.1016/j.tre.2012.12.001

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