City Research Online

Abstract

This paper discusses an extension of the traditional lognormal representation for the risk neutral spot freight rate dynamics to a diffusion model overlaid with jumps of random magnitude and arrival. Then, we develop a valuation framework for options on the average spot freight rate, which are commonly traded in the freight derivatives market. By exploiting the computational efficiency of the proposed pricing scheme, we calibrate the jump diffusion model using market quotes of options on the trip-charter route average Baltic Capesize, Panamax and Supramax Indices. We show that the jump-extended setting yields important model improvements over the basic lognormal setting.

Publication Type:	Article
Additional Information:	© 2013 Elsevier. Licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International http://creativecommons.org/licenses/by-nc-nd/4.0/
Publisher Keywords:	Shipping, Spot freight rates, Jump diffusion model, Forward start average options, Freight option price model
Subjects:	H Social Sciences > HE Transportation and Communications H Social Sciences > HF Commerce H Social Sciences > HG Finance
Departments:	Bayes Business School
SWORD Depositor:	Symplectic Administrator

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