Optimal tanker chartering decisions with spot freight rate dynamics considerations

We study a tanker chartering decision problem faced by refinery companies. The decision process is formulated as an optimal stopping problem with geometric Brownian motion for the spot freight rate dynamics and a Poisson type arrival process for the tankers. We show the problem can be solved efficiently by partial differential equations. The study, for the first time, provides innovative techniques for modeling freight rate uncertainty facing refinery companies. An application of the model to a refinery company in China shows the benefit of our method compared to the company’s current tanker-chartering strategy.

► Optimal tanker chartering decision is formulated as an optimal stopping model with GBM for the spot freight rate dynamics.
► The tanker arrivals are modeled as a Poisson-type process.
► We show the problem can be solved efficiently by partial differential equations.
► The optimal solution can be characterized by a threshold function.
► The benefit of our model compared with an actual company’s current tanker-chartering strategy is promising.