Hedging residual value risk using derivatives

Sylvain Prado

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Abstract: In the leasing industry the lessor faces a risk, at the end of the contract, in not recovering su¢ cient 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)
Date: 2009
Note: View the original document on HAL open archive server: https://hal.science/hal-04140859
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