The value of embedded real options: Evidence from consumer automobile lease contracts

Document Type

Article

Publication Title

Journal of Finance

Publication Date

2-1-2007

Abstract

Under the common assumption of constant interest rates, we show that penalties for early termination of a lease are often structured in such a way that the cancellation option embedded in consumer automotive leases has little value. Furthermore, our estimates drawn from a sample of three popular car models over 1990 to 2000 indicate that the stand-alone value of the lease-end purchase option is, on average, about 16% of the market value of underlying used vehicles, or about $1,462 per contract. Finally, we examine the sensitivity of our option value estimates to model parameters and default risk.

Volume

62

Issue

1

First Page

411

Last Page

445

DOI

10.1111/j.1540-6261.2007.01211.x

ISSN

00221082

E-ISSN

15406261

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