Valuation of time charter contracts for ships

Abstract

This article describes a valuation method for time charter contracts for ships, i.e. leasing contracts for ships with embedded Bermudan options for buying the ship and extending the contract. As there often are embedded foreign exchange options in the buy options on the ship, a two factor stochastic model is developed and it is shown how the price can be determined applying techniques from contingent claim analysis such as dynamic programming.

Acknowledgement

I would like to thank CEO Carsten Mortensen, former CFO Jens Fehrn Christensen and former COO Jakob Meldgaard from the Danish shipping company D/S “NORDEN” A/S that introduced me to the valuation problem in 2001 and based on fruitful discussions about how the shipping market works led me to the approach described in this article. Furthermore, I would like to thank Group Treasurer Stig Kelstrup, Senior Analyst Morten Kjærgaard and Head of Risk Management Marianne Christensen from D/S “NORDEN” A/S for exchanging experiences applying a model based on this approach for evaluation of the portfolio of charterparties in D/S “NORDEN” A/S.