Investing in Marine Scrubber under Uncertainty with Real Option Thinking

Research output: Contribution to conferencePaperResearchpeer-review

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Abstract

Scrubber technology is one of the valid alternatives to comply with the tightening sulphur regulation. Due to the high uncertainty associated with the oil price and shipping market, making decision about whether and when to invest in marine scrubber is very difficult. In contrast to the previous works that examine the economic feasibility of scrubber retrofitting through the net present value rule, this paper applies the Real Option Analysis to find the optimal investment strategies. The proposed decision-making framework addresses the uncertainty and the value of deferral option embedded in the scrubber investment. The multiple sources of investment uncertainties are explicitly analyzed and integrated in the modeling by using Rainbow option. The results demonstrate that the value of the scrubber investment has significantly increased for several cases by considering the deferral option. It is thus important for ship owners to consider the available options before proceeding with abandoning or investing strategy. The proposed framework can be widely applied to other ship retrofitting investment evaluations, which include similar investment alternatives and uncertainties.
Original languageEnglish
Publication date2016
Number of pages16
Publication statusPublished - 2016
EventThe Annual Conference of the International Association of Maritime Economists. IAME 2016 - Hamborg, Germany
Duration: 23 Aug 201626 Aug 2016
Conference number: 24
https://www.iame2016.org/

Conference

ConferenceThe Annual Conference of the International Association of Maritime Economists. IAME 2016
Number24
CountryGermany
CityHamborg
Period23/08/201626/08/2016
OtherAnnual conference of the International Association of Maritime Economists (IAME)
Internet address

Keywords

  • Real options
  • Scrubber technology
  • Deferral option
  • Rainbow option
  • Flexibility
  • Uncertainty

Cite this

Jiang, L., & Hansen, C. Ø. (2016). Investing in Marine Scrubber under Uncertainty with Real Option Thinking. Paper presented at The Annual Conference of the International Association of Maritime Economists. IAME 2016, Hamborg, Germany.
Jiang, Liping ; Hansen, Carsten Ørts. / Investing in Marine Scrubber under Uncertainty with Real Option Thinking. Paper presented at The Annual Conference of the International Association of Maritime Economists. IAME 2016, Hamborg, Germany.16 p.
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abstract = "Scrubber technology is one of the valid alternatives to comply with the tightening sulphur regulation. Due to the high uncertainty associated with the oil price and shipping market, making decision about whether and when to invest in marine scrubber is very difficult. In contrast to the previous works that examine the economic feasibility of scrubber retrofitting through the net present value rule, this paper applies the Real Option Analysis to find the optimal investment strategies. The proposed decision-making framework addresses the uncertainty and the value of deferral option embedded in the scrubber investment. The multiple sources of investment uncertainties are explicitly analyzed and integrated in the modeling by using Rainbow option. The results demonstrate that the value of the scrubber investment has significantly increased for several cases by considering the deferral option. It is thus important for ship owners to consider the available options before proceeding with abandoning or investing strategy. The proposed framework can be widely applied to other ship retrofitting investment evaluations, which include similar investment alternatives and uncertainties.",
keywords = "Real options, Scrubber technology, Deferral option, Rainbow option, Flexibility, Uncertainty, Real options, Scrubber technology, Deferral option, Rainbow option, Flexibility, Uncertainty",
author = "Liping Jiang and Hansen, {Carsten {\O}rts}",
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Jiang, L & Hansen, CØ 2016, 'Investing in Marine Scrubber under Uncertainty with Real Option Thinking' Paper presented at, Hamborg, Germany, 23/08/2016 - 26/08/2016, .

Investing in Marine Scrubber under Uncertainty with Real Option Thinking. / Jiang, Liping; Hansen, Carsten Ørts.

2016. Paper presented at The Annual Conference of the International Association of Maritime Economists. IAME 2016, Hamborg, Germany.

Research output: Contribution to conferencePaperResearchpeer-review

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T1 - Investing in Marine Scrubber under Uncertainty with Real Option Thinking

AU - Jiang, Liping

AU - Hansen, Carsten Ørts

PY - 2016

Y1 - 2016

N2 - Scrubber technology is one of the valid alternatives to comply with the tightening sulphur regulation. Due to the high uncertainty associated with the oil price and shipping market, making decision about whether and when to invest in marine scrubber is very difficult. In contrast to the previous works that examine the economic feasibility of scrubber retrofitting through the net present value rule, this paper applies the Real Option Analysis to find the optimal investment strategies. The proposed decision-making framework addresses the uncertainty and the value of deferral option embedded in the scrubber investment. The multiple sources of investment uncertainties are explicitly analyzed and integrated in the modeling by using Rainbow option. The results demonstrate that the value of the scrubber investment has significantly increased for several cases by considering the deferral option. It is thus important for ship owners to consider the available options before proceeding with abandoning or investing strategy. The proposed framework can be widely applied to other ship retrofitting investment evaluations, which include similar investment alternatives and uncertainties.

AB - Scrubber technology is one of the valid alternatives to comply with the tightening sulphur regulation. Due to the high uncertainty associated with the oil price and shipping market, making decision about whether and when to invest in marine scrubber is very difficult. In contrast to the previous works that examine the economic feasibility of scrubber retrofitting through the net present value rule, this paper applies the Real Option Analysis to find the optimal investment strategies. The proposed decision-making framework addresses the uncertainty and the value of deferral option embedded in the scrubber investment. The multiple sources of investment uncertainties are explicitly analyzed and integrated in the modeling by using Rainbow option. The results demonstrate that the value of the scrubber investment has significantly increased for several cases by considering the deferral option. It is thus important for ship owners to consider the available options before proceeding with abandoning or investing strategy. The proposed framework can be widely applied to other ship retrofitting investment evaluations, which include similar investment alternatives and uncertainties.

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KW - Rainbow option

KW - Flexibility

KW - Uncertainty

KW - Real options

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KW - Deferral option

KW - Rainbow option

KW - Flexibility

KW - Uncertainty

M3 - Paper

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Jiang L, Hansen CØ. Investing in Marine Scrubber under Uncertainty with Real Option Thinking. 2016. Paper presented at The Annual Conference of the International Association of Maritime Economists. IAME 2016, Hamborg, Germany.