Income uncertainty and the decision to invest in bulk shipping

Abstract

We develop a coherent framework for the valuation of real assets and determination of the optimal time to invest. To this end, we model the stochastic nature of income and develop methodologies for valuing traded derivatives to facilitate model calibration. A valuation paradigm for freight‐linked assets is then presented and, using a real option approach, we demonstrate its usefulness in investment appraisal and optimal timing of entry in the shipping industry. We find that long‐run freight rate and volatility have an impact on the decision timing and value of the investment that diminishes with increasing vessel age. As time to build declines, the value of the option to wait increases implying a high opportunity cost embedded in the investment decision due to construction lags.

Earnings yield and predictability in the dry bulk shipping industry

“…This FOE can be interpreted as a "delivery premium" or "convenience yield" for having the vessel readily available for leasing and is reflected on the relation between net earnings and the ratio of the 5-year old to the contemporaneous newbuilding vessel prices: during market upturns the ratio is significantly higher than one and vice versa (Kyriakou et al, 2018). At the same time, higher net earnings result in higher current net investment, defined as:…”

A survey of shipping finance research: Setting the future research agenda

“…• The model is applied to a fleet expansion project which has been financed by the EIB Kyriakou et al (2017b) Develop a ROA framework for evaluating investments in dry bulk vessels…”

“…29 Several other studies adopt the ROA framework to value specific operating/financing options embedded in shipping investments and across the different segments and sub-segments of the shipping markets. For example, Kyriakou et al (2017b) propose a ROA model for investments valuation and timing in the dry bulk segment based on the exponential mean-reverting property of freight rates. Rau and Spinler (2016) propose a ROA for optimal investment decisions in liner shipping under the assumption of oligopolistic competition.…”

Two New Strategies for Pricing Freight Options by Means of a Valuation PDE and by Functional Bounds

“…Prokopczuk [1] considers that the log spot freight follows an Ornstein-Uhlenbeck process and studies the pricing and hedging of freight futures contract. When the log spot follows a jump-diffusion stochastic process, an accurate valuation of freight options is developed by Nomikos et al [6] and Kyriakou et al [7].…”