Valuation of freight transportation contracts under uncertainty

This paper applies concepts from the theory of Real Options to hedge uncertainty in transportation capacity and cost using derivative contracts, called truckload options. We make three contributions. First, we provide a closed-form pricing formula for basic truckload options when the truckload spot price on a given lane follows a simple mean-reverting process. Second, since only monthly statistics about truckload spot prices are currently available, we provide an approach to estimate the parameters needed to value truckload options. Finally, a numerical illustration based on real data shows that truckload options could be valuable to both shippers and carriers.

► We propose a simple mean-reverting process to model the spot prices of truckloads. ► Closed-form formulas for European call and put truckload options are derived. ► We explain how to estimate model parameters from seasonally adjusted statistics. ► Our case study shows that truckload options would benefit shippers and carriers. ► We provide conditions for a truckload options market to function well.