The Pricing of Freight Options with Stochastic Volatilities

Abstract

Abstract─The purpose of this paper is to investigate the freight option pricing problem. In this paper we set up the theoretical framework for the valuation of options traded in the freight derivatives market. The option price is determined in series form for the case in which the stochastic volatility is independent of the freight. Numerical solutions are also produced for the case in which the volatility is correlated with the freight. In a Monte Carlo experiment we show that our formula gives accurate prices.

An innovative tool for cost control under fragmented scenarios: The container freight index microinsurance

“…For instance, Koekebakker et al (2007) constructed a freight fitting model based on lognormal distribution, and deduced the closed pricing formula of Asian call and put options with fixed execution prices, which significantly improved the pricing and hedging accuracy. Based on Monte Carlo simulation, Wang et al (2009) constructed the Asian option pricing model with the lognormal distribution and fixed strike price. Haug (2021) gave the Turnbull and Wakeman (1991) adjustment closed formula to calculate the settlement price of freight options on the European Energy Exchange.…”