Abstract
The objective of this paper is to evaluate one of maritime investment projects’ intrinsic flexibilities, namely the ship-owner’s ability to switch between two kinds of charter contracts, the voyage charter and the time charter, which produce different levels of exposure to uncertainties. We consider a case study represented by the investment in a Suezmax tanker, using international market data. The Trigeorgis (1996) model of switching between operational modes was used to value flexibility, with cash flow simulations being used in the calculation of expanded present values. The time charter and the voyage charter freight rates, and the bunker prices were the uncertainties considered in this study, modeled as mean reverting processes. The study shows that the real option adds approximately 12.9% to the value of the project without flexibility.
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