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

Andrea Gamba and Riccardo Rigon

Finance Research Letters, 2008, vol. 5, issue 4, 213-220

Abstract: Giaccotto et al. [2007. Journal of Finance 62, 411-445] provide a simple model for pricing the cancellation and the purchase options typically embedded in automobile lease contracts, assuming constant interest rates. They show that the cancellation option is worthless because of a penalty applied if the lease is terminated before maturity. We extend their results by developing a model with stochastic interest rates, and show that the cancellation option has a significant value also in presence of the penalty. We provide sufficient conditions to make the cancellation option worthless in our more general framework.

Keywords: Leasing; Derivate; pricing; Stochastic; interest; rates (search for similar items in EconPapers)
Date: 2008
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Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:5:y:2008:i:4:p:213-220

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