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A Study on the Application of Real Option Method in the Decision Making of Shipping Investment

Author: JiangYiQing
Tutor: TianJianFang
School: Shanghai Maritime University
Course: Finance and Accounting
Keywords: ship investment Real Options managerial flexibility investment decision making
CLC: F550
Type: Master's thesis
Year: 2002
Downloads: 254
Quote: 5
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Abstract


Ship owners often make the decision to finance the ship, and the ship investment is the basis of shipping reproduction; the precondition of shipping. But unfortunately, the traditionally used Discounted Cash Flow(DCF) method is localized by its own limitations. In addition, ship investment has its own specialty characterizes other kind of investment, such as massive investment; long period for investment; many managerial flexibilities and so on. All these make it difficult to solve the problem of ship investment with traditional investment decision method. As concerned as that, I want to find a more suited and effective method to make ship investment decision, so I try to apply the Real Options method to the ship investment decision making. The Real Options method utilizes the ideas of financial options, treat the investment project as option, and to correctly price the managerial flexibilities which is hard to price with traditional method and is critical to the investment project. The utilization of the Real Options method can consider all kinds of characteristics of ship investment comprehensively, and objectively appraise the value of project. Even more, it can help ship owners to avoid the eyeless ship investment for the reason of lacking the analytical tools.In the practical application of the Real Options method in ship investment in this article, I classified the diversified managerial flexibilities into several categories, and discussed three of them (lay-up flexibility > quit flexibility and postponement flexibility) chapter by chapter, established the frameworks and price models for corresponding real options(annual operating option > abandonment option and waiting option),and computed the value of real option in the given examples. The most creative idea in this article is that I represent the value ofproject with the summation of several real options’ value, that is to say regard the whole project as the combination of managerial flexibilities. I pointed out the problems appear in the models in the last chapter, but be sure that it’s just the problem of computing and won’t affect the practical application of Real Options method to the ship investment. The article ended up with the conclusion that the Real Options method will help ship owners to make more effective and sensible decision.

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CLC: > Economic > Transportation and economic > Sea transport and economic > Waterway transport economic theory
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