Option Pricing In Dry Bulk Shipping Market

There is a rapid development in Shipping Finance. For the purpose of reducing risk or seeking high profit, more and more financial derivate tools have been introduced to shipping market. Currently, there is already a long time action on future rate and future rate index till, although some frustration, there is a big success achieved and what is more important, a principle has been established. Now, more and more shipping participates and investers and putting their eyes on a more efficient derivate tools, option, also it is a tool of higher risk. But due to ite natural lever effect, it will reduce the risk more effeciently, but the risk of the tool itself is even higher. Till now, the research on shipping option is just on the first step and there it rare papers or dissertation about it. This paper use the option tools of the financial market and consider the unique characters of the shipping market, establishing a new approach for estimating the pricing of options in the shipping environment. This method utilised analytical solutions and numerical techniques in order to represent to a high degree the value of options on freight rates in different situations. The method of Fourier series approximation was used for determining the Future Freight rate model as function of time and current spot freight rate. It was shown that it is very flexible and versatile since it can be applied quickly and easily to any main shipping route. The mean return drift rate obtained by the Fourier model was managed to be adjusted for risk. In order to adjust the return for risk the World Free floating MSCI Index was used to represent the capital market.Hedging example were constructed in order to show the importance of options in hedging in shipping. Numerous trading strategies were developed with actual data in order to meet any traders' specific requirements. From the examples, we can see no matter in risk reducing or risk investment, shipping option pricing has a bright future.Finally, we make an anlysis of the current shipping market in China. Althought it is a little earlier to introduce the shipping option into Chinese shipping market, theresearch on shipping option has already began in some country, such as UK. If we want to catch the develop speed of the world shipping market, and ture Chinese shipping market from big to strong, we should prepare earlier.