Title

Valuation of Lease Contracts with a Price Adjustment Option: An Application to the Maritime Transport Industry

Abstract

In volatile lease markets, a fixed rate contract may allow one contract party to gain excessive profits while letting the other party face substantial losses. The flexibility in adjusting the contract rate can help address this issue and maintain a fair long-term relationship. This article models and prices the flexibility using real options and derives the boundary of option exercise to facilitate the optimal decision on the rate adjustment. The proposed method is applied to time charter contracts in the maritime transport industry. Moreover, the level of flexibility can be tailored to meet different budgets for the flexibility.

Department(s)

Engineering Management and Systems Engineering

International Standard Serial Number (ISSN)

0013-791X

Document Type

Article - Journal

Document Version

Citation

File Type

text

Language(s)

English

Rights

© 2014 Institute of Industrial Engineers, All rights reserved.

Share

 
COinS