Abstract
Uncertainties in transportation capacity and costs pose a significant challenge for both shippers and carriers in the trucking industry. One way to hedge these uncertainties is to use concepts from the theory of Real Options to craft derivative contracts, which we call truckload options in this paper. In its simplest form, a truckload call (put) option gives its holder the right to buy (sell) truckload services on a specific route, at a predetermined price on a predetermined date. The holder decides if a truckload option should be exercised depending on information available when the option expires. Truckload options are not yet available, however, so the purpose of this paper is to develop a truckload options pricing model and to show the usefulness of truckload options to both shippers and carriers. Since the price of a truckload option depends on the spot price of a truckload, we first model the dynamics of spot rates using a common stochastic process. Unlike financial markets where high frequency data are available, spot prices for trucking services are not public and we can only observe some monthly statistics. This complicates slightly the estimation of necessary parameters, which we obtain via two independent methods (variogram analysis and maximum likelihood), before developing a truckload options pricing formula. A numerical example based on real data shows that truckload options would be quite valuable to the trucking industry.
