The Value of Embedded Real Options: Evidence from Consumer Automobile Lease Contracts

Carmelo Giaccotto, Gerson M. Goldberg and Shantaram P. Hegde

Journal of Finance, 2007, vol. 62, issue 1, 411-445

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.

Date: 2007
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https://doi.org/10.1111/j.1540-6261.2007.01211.x

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Persistent link: https://EconPapers.repec.org/RePEc:bla:jfinan:v:62:y:2007:i:1:p:411-445

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