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 an...

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Bibliographic Details
Published inThe Engineering economist Vol. 59; no. 1; pp. 30 - 54
Main Authors al sharif, Ahmed A. A., Qin, Ruwen
Format Journal Article
LanguageEnglish
Published Norcross Taylor & Francis 02.01.2014
Taylor & Francis Inc
Subjects
Boundaries
Contract management
Contracts
Decision making models
Flexibility
Gain
Leases
Maritime
Maritime industry
Optimization
Profitability
Real options analysis
Studies
Transport
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Summary: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.
Bibliography:ObjectType-Article-1
SourceType-Scholarly Journals-1
ObjectType-Feature-2
content type line 23
ISSN:0013-791X
1547-2701
DOI:10.1080/0013791X.2013.869646