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Valuation of VLCCs under income uncertainty

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  • Jostein Tvedt†

Abstract

In this paper two alternative ways of modelling the stochastic nature of the time charter equivalent spot rate in the market for Very Large Crude Carriers (VLCC) are presented. It has been proposed that the freight rate follows an Ornstein-Uhlenbeck process. We follow up this approach of relating uncertainty directly to the rate process itself by suggesting a geometric mean reversion process. Empirical findings are presented. Then we address the question of valuing a VLCC. Due to the presence of uncertainty, flexibility to choose operation policy influences the value. We focus on lay up and scrapping as alternatives to spot operation. The option to lay up is relatively more important for a new vessel than for an old one, whereas the option to scrap becomes relatively more valuable as the vessel gets older.

Suggested Citation

  • Jostein Tvedt†, 1997. "Valuation of VLCCs under income uncertainty," Maritime Policy & Management, Taylor & Francis Journals, vol. 24(2), pages 159-174, January.
    • Handle: RePEc:taf:marpmg:v:24:y:1997:i:2:p:159-174
    DOI: 10.1080/03088839700000067
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    Cited by:

    1. Alizadeh, Amir H. & Nomikos, Nikos K., 2007. "Investment timing and trading strategies in the sale and purchase market for ships," Transportation Research Part B: Methodological, Elsevier, vol. 41(1), pages 126-143, January.
    2. Peter Løchte Jørgensen & Domenico De Giovanni, 2010. "Time Charters with Purchase Options in Shipping: Valuation and Risk Management," Applied Mathematical Finance, Taylor & Francis Journals, vol. 17(5), pages 399-430.
    3. Alesii, Giuseppe, 2005. "VaR in real options analysis," Review of Financial Economics, Elsevier, vol. 14(3-4), pages 189-208.
    4. Engelen, Steve & Norouzzadeh, Payam & Dullaert, Wout & Rahmani, Bahareh, 2011. "Multifractal features of spot rates in the Liquid Petroleum Gas shipping market," Energy Economics, Elsevier, vol. 33(1), pages 88-98, January.
    5. Adland, Roar & Jia, Haiying & Lu, Jing, 2008. "Price dynamics in the market for Liquid Petroleum Gas transport," Energy Economics, Elsevier, vol. 30(3), pages 818-828, May.
    6. Tvedt, Jostein, 2002. "The effect of uncertainty and aggregate investments on crude oil price dynamics," Energy Economics, Elsevier, vol. 24(6), pages 615-628, November.

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