Switching options in tanker shipping markets: a new approach to product tanker valuation
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- Master Thesis 
The thesis investigates the value of a switching option for an LR2 product tanker, which can switch between dirty and clean freight markets, using a real option valuation model based on a stochastic freight rate differential between the two markets along with the optimal switching policy. The parameters have been estimated based on empirical methods of the freight rates from two resembling routes in the time interval of January 1997 to November 2015. The authors find that the flexibility may add value to owners engaging in switching strategies, especially at the end of the time series, when the freight rate differential is in favor of the dirty market. However, the value of the option and the optimal switching policy is highly dependent on the parameters. This is indicated in the sensitivity analysis and rolling window estimation. The sensitivity analysis shows how some of the parameters affect the value and optimal switching policy. Meanwhile, the rolling window estimation indicates that the model’s assumptions regarding constant parameters seem to be unrealistic over time, thus the model may not be suitable to use when valuating the option and finding the optimal switching strategy. Furthermore it indicates that the sample used to estimate parameters has a large impact on the value of the option. Finally, the general limitations of the model are discussed and how these may lead an unrealistic valuation.