The value of timecharter optionality in the drybulk market

Abstract

Using an optimization model on a network with stochastic travel times we estimate the value of flexible worldwide redelivery compared to the more constrained Atlantic ocean option. We evaluate the value of the redelivery option for two types of ship operators: The “oracle operator” with full knowledge about the future and the “FFA operator” who bases his predictions about future freight rates on freight forward prices. Our numerical analysis suggests that the worldwide redelivery option can add around $500,000 to the cumulative profit from a 9 to 12 month timecharter for a mid-size bulk vessel. Our findings are important for the understanding of the value of optionality in chartering contracts.