Valuation of asset leasing contracts

https://doi.org/10.1016/0304-405X(83)90037-5Get rights and content

Abstract

This paper describes the relation among a variety of asset leasing contracts, including: (1) cancellable operating leases; (2) leases which grant the lesse an option to extend the life of the lease; (3) leases that grant the lessee an option to purchase the leased asset at a fixed price at the maturity date of the lease; (4) leases that grant the lessee the right to purchase the leased asset at its ‘fair market value’ at the maturity date of the lease; (5) leases that grant an option to the lessee to purchase the leased asset at a prespecified price anytime during the life of the lease; (6) leases that require the lessee to purchase the leased asset at a fixed price at the maturity date of the lease; and (7) leases that contain non-cancellation provisions. The paper uses a compound option pricing framework to develop a general model for valuing (or evaluating) each of the types of leasing contracts. Numerical examples are presented to illustrate the effect of the various elements of a leasing contract — including cancellation risk and residual value risk — on equilibrium rental payments.

References (21)

  • F. Black et al.

    Valuing corporate securities: Some effects of bond indenture conditions

    Journal of Finance

    (1976)
  • F. Black et al.

    The pricing of options and corporate liabilities

    Journal of Political Economy

    (1973)
  • R.S. Bower

    Issues in lease financing

    Financial Management

    (1973)
  • M.J. Brennan et al.

    The equilibrium term structure of lease rates

    (1982)
  • T. Copeland et al.

    A note on the evaluation of cancellable operating leases

    Financial Management

    (1982)
  • P.J. Crawford et al.

    Further evidence on the terms of financial leases

    Financial Management

    (1981)
  • R.N. Curnow et al.

    The numerical evaluation of certain multivariate normal integrals

    Annals of Mathematical Statistics

    (1962)
  • E.F. Fama

    Foundations of finance

    (1976)
  • J. Franks et al.

    Valuation of financial lease contracts: A note

    Journal of Finance

    (1978)
  • R. Geske

    The valuation of corporate liabilities as compound options

    Journal of Financial and Quantitative Analysis

    (1977)
There are more references available in the full text version of this article.

Cited by (98)

  • The financial leasing and real options valuation

    2016, Contaduria y Administracion
  • A reduced-form model for lease contract valuation with embedded options

    2024, Review of Quantitative Finance and Accounting
  • Modeling financial leasing by optimal stopping approach

    2024, Decisions in Economics and Finance
View all citing articles on Scopus

This paper has benefited from helpful comments and suggestions by Jim Brickley, Mike Long, Tim Nantell, Byung Ro, and Charles Tritschler and from presentations at the University of Michigan and the University of Utah. We are especially grateful for the helpful comments by the referee, Stewart Myers.

View full text