Valuation of Lease Contracts with a Price Adjustment Option: An Application to the Maritime Transport Industry
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.
A. A. al sharif and R. Qin, "Valuation of Lease Contracts with a Price Adjustment Option: An Application to the Maritime Transport Industry," The Engineering Economist, vol. 59, no. 1, pp. 30-54, Institute of Industrial Engineers, Jan 2014.
The definitive version is available at http://dx.doi.org/10.1080/0013791X.2013.869646
Engineering Management and Systems Engineering
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