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Ship Investment under Uncertainty: Valuing a Real Option on the Maximum of Several Strategies

Author

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  • Helen B Bendall

    (Finance and Economics, University of Technology, Sydney, Lindfield NSW 2070, Australia.)

  • Alan F Stent

    (Finance and Quantitative Analysis, University of Otago, PO Box 56, Dunedin, New Zealand.)

Abstract

This paper demonstrates the use of real option analysis to value the flexibility available to management decision making in introducing an express liner service using a new technology. The ship operator's decision is framed as an option to exchange the risky income stream of one strategy (asset) for the maximum of several alternatives as uncertainty is resolved over time. Copeland's and Antikarov's Marketable Asset Disclaimer is invoked; the intrinsic values of the underlying assets and their volatilities and correlations are modelled using traditional discounted cash flow techniques. The option is valued numerically in a multinomial tree. The result is the value of flexibility and is added to the present value of the original strategy to derive the present value of the flexible strategy. A sensitivity analysis is performed to examine the value of the flexible strategy as both the levels of uncertain factors and their volatilities change. Maritime Economics & Logistics (2005) 7, 19–35. doi:10.1057/palgrave.mel.9100122

Suggested Citation

  • Helen B Bendall & Alan F Stent, 2005. "Ship Investment under Uncertainty: Valuing a Real Option on the Maximum of Several Strategies," Maritime Economics & Logistics, Palgrave Macmillan;International Association of Maritime Economists (IAME), vol. 7(1), pages 19-35, March.
    • Handle: RePEc:pal:marecl:v:7:y:2005:i:1:p:19-35
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    Citations

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    Cited by:

    1. Shun Chen & Shiyuan Zheng & Qiang Zhang, 2018. "Investment decisions under uncertainty on LNG-powered vessels for environmental compliance," Journal of Shipping and Trade, Springer, vol. 3(1), pages 1-19, December.
    2. Alexandridis, George & Kavussanos, Manolis G. & Kim, Chi Y. & Tsouknidis, Dimitris A. & Visvikis, Ilias D., 2018. "A survey of shipping finance research: Setting the future research agenda," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 115(C), pages 164-212.
    3. Haehl, Christian & Spinler, Stefan, 2018. "Capacity expansion under regulatory uncertainty:A real options-based study in international container shipping," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 113(C), pages 75-93.
    4. José Martins & Rui Cunha Marques & Carlos Oliveira Cruz & Álvaro Fonseca, 2017. "Flexibility in planning and development of a container terminal: an application of an American-style call option," Transportation Planning and Technology, Taylor & Francis Journals, vol. 40(7), pages 828-840, October.
    5. Rau, Philipp & Spinler, Stefan, 2016. "Investment into container shipping capacity: A real options approach in oligopolistic competition," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 93(C), pages 130-147.
    6. BALLIAUW, Matteo, 2015. "An analysis of entry and exit decisions in shipping markets under uncertainty," Working Papers 2015013, University of Antwerp, Faculty of Business and Economics.
    7. Axarloglou, Kostas & Visvikis, Ilias & Zarkos, Stefanos, 2013. "The time dimension and value of flexibility in resource allocation: The case of the maritime industry," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 52(C), pages 35-48.
    8. Haehl, Christian & Spinler, Stefan, 2020. "Technology Choice under Emission Regulation Uncertainty in International Container Shipping," European Journal of Operational Research, Elsevier, vol. 284(1), pages 383-396.
    9. Ying Kou & Meifeng Luo, 2016. "Strategic capacity competition and overcapacity in shipping," Maritime Policy & Management, Taylor & Francis Journals, vol. 43(4), pages 389-406, May.
    10. Majid Eskafi & Reza Fazeli & Ali Dastgheib & Poonam Taneja & Gudmundur F. Ulfarsson & Ragnheidur I. Thorarinsdottir & Gunnar Stefansson, 2020. "A value-based definition of success in adaptive port planning: a case study of the Port of Isafjordur in Iceland," Maritime Economics & Logistics, Palgrave Macmillan;International Association of Maritime Economists (IAME), vol. 22(3), pages 403-431, September.
    11. Konstantinos Drakos & Dimitris Tsouknidis, 2024. "Investment under uncertainty and irreversibility: Evidence from the shipping markets," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 29(2), pages 2139-2154, April.
    12. Cimpeanu, Radu & Devine, Mel T. & O’Brien, Conor, 2017. "A simulation model for the management and expansion of extended port terminal operations," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 98(C), pages 105-131.
    13. Hu, Qiwei & Zhang, Anming, 2015. "Real option analysis of aircraft acquisition: A case study," Journal of Air Transport Management, Elsevier, vol. 46(C), pages 19-29.
    14. Sinem Celik Girgin & Thanasis Karlis & Hong-Oanh Nguyen, 2018. "A Critical Review of the Literature on Firm-Level Theories on Ship Investment," IJFS, MDPI, vol. 6(1), pages 1-19, January.
    15. Kou, Ying & Luo, Meifeng, 2018. "Market driven ship investment decision using the real option approach," Transportation Research Part A: Policy and Practice, Elsevier, vol. 118(C), pages 714-729.
    16. Pantuso, Giovanni & Fagerholt, Kjetil & Hvattum, Lars Magnus, 2014. "A survey on maritime fleet size and mix problems," European Journal of Operational Research, Elsevier, vol. 235(2), pages 341-349.

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