The value of embedded real options: Evidence from consumer automobile lease contracts
Journal of Finance
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.
Giaccotto, C., Goldberg, G., & Hegde, S. (2007). The value of embedded real options: Evidence from consumer automobile lease contracts. Journal of Finance, 62 (1), 411-445. https://doi.org/10.1111/j.1540-6261.2007.01211.x