Hedging residual value risk using derivatives

Sylvain Prado

No 2009-31, EconomiX Working Papers from University of Paris Nanterre, EconomiX

Abstract: Abstract: In the leasing industry the lessor faces a risk, at the end of the contract, in not recovering sufficient capital value from resale of the asset. We propose a model to hedge residual value risk using the Gaussian copula methodology. After discussing residual value risk and credit risk modelization, a new derivative product is introduced and analyzed; the Collateralized Residual Values (CRV). The model is applied to an European auto lease portfolio of operating lease contracts pertaining to a major company. Our results indicate that the financial product is easy to customize, and to implement through the contract characteristics and the level of correlation.

Keywords: Residual value risk; credit risk; credit derivatives; factor modeling; copula (search for similar items in EconPapers)
JEL-codes: C10 G13 (search for similar items in EconPapers)
Pages: 46 pages
Date: 2009
New Economics Papers: this item is included in nep-fmk and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:drm:wpaper:2009-31

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