Real option analysis on offshore day-by-day contracts in the North Sea : is there additional value for the charterer?

2017

This thesis investigates the value of optionality in day-by-day spot contracts for PSV and AHTS

in the OSV-spot market, where the charterer can replace the initial vessel with an alternative

vessel in the spot market or renegotiate the contract, by using the real options embedded in the

contracts. Even though there are usually replacement costs for the charterer when replacing the

initially hired vessel prior to the contract’s expiry, a significantly large spread between the

initial contract rate and the current spot rate may still see the charterer benefit from terminating,

or renegotiating, the initial contract. We perform an analysis based on a stochastic process,

where parameter estimates are based on historic spot rates for various vessel types from 1996

to 2017. In addition to vessel type, we further distinguish between different exercise

frequencies/options, where AHTS contracts allow for exercising the termination option every

fifth day, and PSV contracts every day.

We find that the optionality may add value for the charterer for both PSV and AHTS, especially

in markets with high demand, hence high rates. However, we find that the value of the

optionality is significant more attractive in the AHTS, despite it lower assumed exercise

frequency. This is mainly due to the higher volatility of AHTS spot rates, making thus AHTS

has higher probability of exercise the option. We also perform a sensitivity analysis on the

parameters, which suggest that replacement cost is the most sensitive parameter affecting the

value of the optionality. Additionally, our thesis discusses how a possible renegotiation process

might affect the valuation of the optionality.

Lastly, our conclusion provides an overview of the analyses performed, and sums up the

valuation of the optionality for various contract specifications.