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

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  • CARMELO GIACCOTTO
  • GERSON M. GOLDBERG
  • SHANTARAM P. HEGDE

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.

Suggested Citation

  • Carmelo Giaccotto & Gerson M. Goldberg & Shantaram P. Hegde, 2007. "The Value of Embedded Real Options: Evidence from Consumer Automobile Lease Contracts," Journal of Finance, American Finance Association, vol. 62(1), pages 411-445, February.
    • Handle: RePEc:bla:jfinan:v:62:y:2007:i:1:p:411-445
    DOI: 10.1111/j.1540-6261.2007.01211.x
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    Citations

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    Cited by:

    1. Amédée-Manesme, Charles-Olivier & des Rosiers, François & Grégoire, Philippe, 2015. "The pricing of embedded lease options," Finance Research Letters, Elsevier, vol. 15(C), pages 215-220.
    2. John Elder, 2019. "Oil price volatility and real options: 35 years of evidence," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 39(12), pages 1549-1564, December.
    3. Richard Stanton & Nancy Wallace, 2009. "An Empirical Test of a Contingent Claims Lease Valuation Model," Journal of Real Estate Research, American Real Estate Society, vol. 31(1), pages 1-26.
    4. Gamba, Andrea & Rigon, Riccardo, 2008. "The value of embedded real options: Evidence from consumer automobile lease contracts--A note," Finance Research Letters, Elsevier, vol. 5(4), pages 213-220, December.
    5. N. Nesterova I. & Н. Нестерова И., 2015. "Применение Реальных Опционов В Лизинговых Проектах // Using Of Real Options In Project Financing With Leased Assets," Финансы: теория и практика/Finance: Theory and Practice // Finance: Theory and Practice, ФГОБУВО Финансовый университет при Правительстве Российской Федерации // Financial University under The Government of Russian Federation, issue 6, pages 179-184.
    6. Jan Vlachý, 2016. "Valuation of Contractual Assets Using Statistical Simulation," Contemporary Economics, University of Economics and Human Sciences in Warsaw., vol. 10(2), June.
    7. Andrikopoulos, Athanasios & Markellos, Raphael N., 2015. "Dynamic interaction between markets for leasing and selling automobiles," Journal of Banking & Finance, Elsevier, vol. 50(C), pages 260-270.
    8. Charles-Olivier Amédée-Manesme & Francois Des Rosiers & Philippe Grégoire, 2017. "Commercial leases, terms and options in the light of game theory," ERES eres2017_175, European Real Estate Society (ERES).

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