ABSTRACT
This chapter focuses on practical examples of how options can be used in freight rate markets. It introduces the main characteristics of freight options. The chapter discusses strategies using freight options for hedging purposes. It shows how a shipowner and a charterer may hedge their positions in the physical freight market by entering a freight option contract. The chapter focuses on the ways freight options may be used in favor of the shipowners seeking finance through a bank loan agreement, by creating a secure floor for their freight rate revenue, while being open to realise benefits if the market increases. It discusses trading on freight options as an asset class that provides an alternative opportunity for an investor. The chapter explains the economics behind freight options markets and reviews the most recent empirical evidence in the topic. It provides a comprehensive coverage of the different methods and techniques used in measuring and managing market risk in freight markets.
