Double-Sided Price Adjustment Flexibility with a Preemptive Right to Exercise
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.
A. A. Al sharif and R. Qin, "Double-Sided Price Adjustment Flexibility with a Preemptive Right to Exercise," Annals of Operations Research, vol. 226, no. 1, pp. 29-50, Springer, Mar 2015.
The definitive version is available at http://dx.doi.org/10.1007/s10479-014-1659-6
Engineering Management and Systems Engineering
Keywords and Phrases
Real options; Procurement/lease contracts; Price risk; Price flexibility; Risk management; Pricing
Article - Journal
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