Title

Double-Sided Price Adjustment Flexibility with a Preemptive Right to Exercise

Abstract

This paper proposes a double-sided flexibility in adjusting the lease price as an alternative, more accessible tool for managing revenues or controlling costs in volatile markets. The double-sided flexibility addresses the dilemma of allowing only one party of a lease contract to have the price adjustment flexibility while both parties want it. Although the proposed clause grants both contract parties the right to adjust the lease price for one time during the contract life, one party can enjoy superior flexibility over the counterparty by buying a preemptive right to exercise it. The paper models the double-sided flexibility as sequentially compounded real options and optimizes the exercise decision for each option owner. The proposed flexibility clause is embedded in time charter contracts in the maritime transport industry to illustrate the effectiveness of it in helping manage the price risk of lease contracts.

Department(s)

Engineering Management and Systems Engineering

Keywords and Phrases

Real options; Procurement/lease contracts; Price risk; Price flexibility; Risk management; Pricing

Document Type

Article - Journal

Document Version

Citation

File Type

text

Language(s)

English

Rights

© 2015 Springer, All rights reserved.

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