ABSTRACT
This chapter intends to describe the use of real options in shipping providing simple practical examples. Shipping companies operate in a highly volatile market where their investment decisions are of vital importance. Companies make their investments having the following as their main objectives: to maximize their profits, to remain competitive, and of course to increase their market value. This implies that they should assess their investment opportunities as efficiently as possible in order to avoid making two serious investment errors: to invest in a project that they should not consider or to not invest in a project that they should have considered. The capital budgeting methods that are commonly used by the majority of firms generally (Kester et al., 1999; Ryan and Ryan, 2002) and shipping companies to assess their investments are based on traditional discount cash flows (DCF) methods. The most widespread DCF methods used by most CFOs regardless of the type of company are the net present value (NPV) and the internal rate of return (IRR) (Graham and Harvey, 2001).
