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Maritime investment strategies with a portfolio of real options

Author

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  • Helen B. Bendall
  • Alan F. Stent

Abstract

The maritime industry operates in a dynamic global environment subject to a great number of variables. In this context, the investment challenge facing shipowners is correctly to value alternate mutually exclusive investment strategies before proceeding with confidence to commit to a project which will add the greatest value to the firm. To survive in the competitive market environment shipping companies must be flexible. Companies that rely solely on traditional discounted cash flow analysis may be underestimating the true value of their investment by not valuing any embedded real options specifically. To avoid misallocation of resources, the true value of these embedded options (strategies) should be recognised and quantified where possible for inclusion in the capital budgeting process. Using real options analysis, (ROA), as a development of the financial pricing advances of the 1970s, flexibility is valued like a financial option using non-arbitrage and added to the present value of the original strategy to derive the present value of the flexible strategy. The more uncertainty (risk) present, the greater will be the value of the real options. Similarly, the larger the shipowner's portfolio of options (strategies) from which to choose, the greater will be the valuation of the project. Real options give the shipowner the flexibility to exchange one risky income stream associated with one strategy for that of another. The analysis shows that if managers have the flexibility of more than one embedded option (in this paper, a European put associated with a replacement investment and an option on the maximum of two operating strategies, trading or chartering out) then the project will have greater value than if the there was no choice or if it was limited to one or the other strategy. Sensitivity analysis extends the analysis to demonstrate that if the volatilities of the risky income streams are highly correlated then the additional value of this flexibility will diminish.

Suggested Citation

  • Helen B. Bendall & Alan F. Stent, 2007. "Maritime investment strategies with a portfolio of real options," Maritime Policy & Management, Taylor & Francis Journals, vol. 34(5), pages 441-452, October.
    • Handle: RePEc:taf:marpmg:v:34:y:2007:i:5:p:441-452
    DOI: 10.1080/03088830701585183
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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. 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.
    3. 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.
    4. 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.
    5. 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.
    6. Xiayan Zhang & Jingbo Yin, 2023. "Assessment of investment decisions in bulk shipping through fuzzy real options analysis," Maritime Economics & Logistics, Palgrave Macmillan;International Association of Maritime Economists (IAME), vol. 25(1), pages 122-139, March.
    7. Rau, Philipp & Spinler, Stefan, 2017. "Alliance formation in a cooperative container shipping game: Performance of a real options investment approach," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 101(C), pages 155-175.
    8. 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.
    9. 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.
    10. 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.
    11. 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.
    12. 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.
    13. 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.
    14. Marcus Matthias Keupp, 2021. "Opportunities for Reform," Springer Books, in: Defense Economics, chapter 0, pages 115-134, Springer.

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