Valuation of the Extension Option in Time Charter Contracts in the LNG Market
A rapid transition toward a decarbonized economy is underway, following the Paris Agreement and the International Maritime Organization 2030 decarbonization goals. However, due to the high cost of the rapid transition to eco-friendly energy and the geopolitical conflict in eastern Europe, liquefied...
| Main Authors: | , , , , , |
|---|---|
| Format: | Article |
| Language: | English |
| Published: |
MDPI AG
2022-09-01
|
| Series: | Energies |
| Subjects: | |
| Online Access: | https://www.mdpi.com/1996-1073/15/18/6737 |
| _version_ | 1797488756349992960 |
|---|---|
| author | Sangseop Lim Chang-hee Lee Won-Ju Lee Junghwan Choi Dongho Jung Younghun Jeon |
| author_facet | Sangseop Lim Chang-hee Lee Won-Ju Lee Junghwan Choi Dongho Jung Younghun Jeon |
| author_sort | Sangseop Lim |
| collection | DOAJ |
| description | A rapid transition toward a decarbonized economy is underway, following the Paris Agreement and the International Maritime Organization 2030 decarbonization goals. However, due to the high cost of the rapid transition to eco-friendly energy and the geopolitical conflict in eastern Europe, liquefied natural gas (LNG), which emits less carbon than other fossil fuels, is gaining popularity. As the spot market grows due to increased LNG demand, the usage of period extension options in time charter (T/C) contracts is increasing; however, these options are generally provided free of charge in practice, without economic evaluation; this is because some shipowners want to make their time charter contracts more attractive to the more credible charterers. Essentially, the reason for why this option has not been evaluated is because there is no reliable evaluation model currently used in practice. That is, research on the evaluation model for the T/C extension option has been insufficient. Therefore, this study evaluates the economic value of the extended period option in LNG time charter contracts using machine learning models, such as artificial neural networks, support vector machines, and random forest, and then compares them with the Black–Scholes model that is used for option valuations in financial markets. The results indicate superior valuation performance of the random forest model compared with the other models; particularly, its performance was significantly better than the Black–Scholes model. Since T/C extension options involve significant sums in the balance sheets of both shipowners and charterers, the fair value of these options should be assessed. In this regard, this paper has meaning in proposing valid machine models to efficiently reflect the fair value of period extension options that are provided at no charge in the LNG market. |
| first_indexed | 2024-03-10T00:07:49Z |
| format | Article |
| id | doaj.art-061b52f486b441ac94e518c3e653e14b |
| institution | Directory Open Access Journal |
| issn | 1996-1073 |
| language | English |
| last_indexed | 2024-03-10T00:07:49Z |
| publishDate | 2022-09-01 |
| publisher | MDPI AG |
| record_format | Article |
| series | Energies |
| spelling | doaj.art-061b52f486b441ac94e518c3e653e14b2023-11-23T16:04:56ZengMDPI AGEnergies1996-10732022-09-011518673710.3390/en15186737Valuation of the Extension Option in Time Charter Contracts in the LNG MarketSangseop Lim0Chang-hee Lee1Won-Ju Lee2Junghwan Choi3Dongho Jung4Younghun Jeon5College of Maritime Sciences, Korea Maritime & Ocean University, Busan 49112, KoreaCollege of Maritime Sciences, Korea Maritime & Ocean University, Busan 49112, KoreaCollege of Maritime Sciences, Korea Maritime & Ocean University, Busan 49112, KoreaLaw School, Dalian Maritime University, No. 1 Liaoning Road, Dalian 116026, ChinaOffshore Platform Research Division, Korea Research Institute of Ship and Ocean Engineering (KRISO), Daejeon 34103, KoreaKorea Marine Equipment Research Institute (KOMERI), Busan 46754, KoreaA rapid transition toward a decarbonized economy is underway, following the Paris Agreement and the International Maritime Organization 2030 decarbonization goals. However, due to the high cost of the rapid transition to eco-friendly energy and the geopolitical conflict in eastern Europe, liquefied natural gas (LNG), which emits less carbon than other fossil fuels, is gaining popularity. As the spot market grows due to increased LNG demand, the usage of period extension options in time charter (T/C) contracts is increasing; however, these options are generally provided free of charge in practice, without economic evaluation; this is because some shipowners want to make their time charter contracts more attractive to the more credible charterers. Essentially, the reason for why this option has not been evaluated is because there is no reliable evaluation model currently used in practice. That is, research on the evaluation model for the T/C extension option has been insufficient. Therefore, this study evaluates the economic value of the extended period option in LNG time charter contracts using machine learning models, such as artificial neural networks, support vector machines, and random forest, and then compares them with the Black–Scholes model that is used for option valuations in financial markets. The results indicate superior valuation performance of the random forest model compared with the other models; particularly, its performance was significantly better than the Black–Scholes model. Since T/C extension options involve significant sums in the balance sheets of both shipowners and charterers, the fair value of these options should be assessed. In this regard, this paper has meaning in proposing valid machine models to efficiently reflect the fair value of period extension options that are provided at no charge in the LNG market.https://www.mdpi.com/1996-1073/15/18/6737LNG markettime charterperiod extension optionoption valuationmachine learningBlack–Scholes |
| spellingShingle | Sangseop Lim Chang-hee Lee Won-Ju Lee Junghwan Choi Dongho Jung Younghun Jeon Valuation of the Extension Option in Time Charter Contracts in the LNG Market Energies LNG market time charter period extension option option valuation machine learning Black–Scholes |
| title | Valuation of the Extension Option in Time Charter Contracts in the LNG Market |
| title_full | Valuation of the Extension Option in Time Charter Contracts in the LNG Market |
| title_fullStr | Valuation of the Extension Option in Time Charter Contracts in the LNG Market |
| title_full_unstemmed | Valuation of the Extension Option in Time Charter Contracts in the LNG Market |
| title_short | Valuation of the Extension Option in Time Charter Contracts in the LNG Market |
| title_sort | valuation of the extension option in time charter contracts in the lng market |
| topic | LNG market time charter period extension option option valuation machine learning Black–Scholes |
| url | https://www.mdpi.com/1996-1073/15/18/6737 |
| work_keys_str_mv | AT sangseoplim valuationoftheextensionoptionintimechartercontractsinthelngmarket AT changheelee valuationoftheextensionoptionintimechartercontractsinthelngmarket AT wonjulee valuationoftheextensionoptionintimechartercontractsinthelngmarket AT junghwanchoi valuationoftheextensionoptionintimechartercontractsinthelngmarket AT donghojung valuationoftheextensionoptionintimechartercontractsinthelngmarket AT younghunjeon valuationoftheextensionoptionintimechartercontractsinthelngmarket |