The Pricing of Freight Options with Stochastic Volatilities

The purpose of this paper is to investigate the freight option pricing problem. In this paper we set up the theoretical framework for the valuation of options traded in the freight derivatives market. The option price is determined in series form for the case in which the stochastic volatility is independent of the freight. Numerical solutions are also produced for the case in which the volatility is correlated with the freight. In a Monte Carlo experiment we show that our formula gives accurate prices.