Real Options in Leasing: The Effect of Idle Time

Chris Kenyon () and Stathis Tompaidis
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Chris Kenyon: IBM Research, Zurich Research Laboratory, Säumerstrasse 4, CH8803 Rüschlikon, Switzerland

Operations Research, 2001, vol. 49, issue 5, 675-689

Abstract: We study options on short-term leases for capital-intensive equipment performing specific functions and services, such as leases for semi-submersible drilling rigs, marine seismic services, corporate real estate leasing, retail space leasing, and apartment leasing. We quantify the effect of an important factor in pricing options on these services: idle time between consecutive lease contracts. We show that while the expected, discounted value for a contract with options is unique, option prices and option exercise prices must be given with respect to a payment structure for the whole contract. We prove that there exist payment schemes in which prices do not depend on exercise probabilities. We use a simple analytic model to derive closed-form solutions for option prices and illustrate our methodology by pricing options for leasing oil-drilling services in the North Sea.

Keywords: Finance: securities: real options; Industries: petroleum: offshore drilling; rig leasing; Cost analysis: opportunity cost of idle time (search for similar items in EconPapers)
Date: 2001
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Citations: View citations in EconPapers (11)

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