Ships as investments have many features similar to marketable ﬁnancial instruments like shares, bonds, or traded options:
- The market price of a ship can be interpreted as the present value of the expected cash ﬂow from the ship during its remaining economic life, discounted at a rate of return that reﬂects the market’s perception (pricing) of downside risks and upside
- The cash ﬂow generated by the operation of the ship over a period of time can be expressed as a percentage of the ship This is similar to the yield from the dividends on a listed share or the yield from the coupon on a bond.
- Charters have diﬀerent durations and rates may vary with the tenor (period) of the
- There are yield curves for charters, which reﬂect forward expectations (a rising market or a falling market). Clarkson’s SIN database normally reports six-month, one-year, three-year, and ﬁve-year charter The forward curve can also be extracted from the various market reports for freight forward agreements (FFA).
- Ships are traded in liquid, transparent and well-reported global markets continuously throughout the
- The cash ﬂow is subject to credit risk (counterparty risk on charters).
- The cash ﬂow is subject to market risk (changes in ship prices and charter rates).
- The age of the ship determines the remaining economic life to demolition, which can be seen as similar to the remaining life to maturity for bonds and
Since ship prices and income are determined inactive liquid markets subject to volatility (risk), it is also relevant to consider the following issues when analyzing a ship’s investment.
I really believe the shipping industry will benefit from a software application for Financial Analysis of Ship Investments that is developed by professionals in dialogue with each other. Your questions, comments, and suggestions are very much appreciated. They become even more valuable when shared with others. Please post your questions, comments, or suggestions in the Pacoship 2.0 User Forum.
Financial modeling of ship investments helps the analyst to get a better understanding of the deal. It makes him or her mindful of the deal and helps to identify what makes it work. Some seasoned shipowners can do this perhaps intuitively on the back of an envelope. For the rest of us, ﬁnancial modeling is a necessary tool, not least so as to be able to document the thought process to third-party investors.