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Advances in Financial Leasing Mechanism Designs

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  • Lucianna Cananà

    (Dipartimento Jonico in “Sistemi Giuridici ed Economici del Mediterraneo: Società, Ambiente, Culture”, Università di Bari, Via Lago Maggiore Angolo Via Ancona, 74121 Taranto, Italy
    These authors contributed equally to this work.)

  • Luigi De Cesare

    (Dipartimento di Economia, Università di Foggia, Via Caggese, 1, 71121 Foggia, Italy
    These authors contributed equally to this work.)

  • Massimiliano Ferrara

    (Dipartimento di Giurisprudenza, Economia e Scienze Umane, Università Mediterranea di Reggio Calabria, 89124 Reggio Calabria, Italy)

Abstract

Financial leasing contracts usually include specific clauses for early termination of the agreement in the event that the lessee defaults. The lessor might, therefore, not immediately ask for termination of the financial lease agreement in order to take advantage of the increment in fees accrued due to the default interest. The analysis presented in this work aims to find the conditions determining the optimal time to rescind the contract, when the arrears’ interest rate is higher than the outstanding fees’ interest rate established in the contract and when the return of alternative investments is deterministic. In this paper, we study the optimal time for advanced termination of a leasing contract to maximize the wealth of the lessor against the natural expiry of the contract. We prove that the optimal time can be found through the intersection of the instantaneous force of interest of a lessor’s credit at a certain date and the instantaneous force of interest of the opportunity cost of capital, or at the initial date or maturity date. To this end, we provide a detailed list of cases in which it is appropriate to terminate the contract or not. The problem is formulated in the case where the opportunity cost follows deterministic and semi-deterministic dynamics.

Suggested Citation

  • Lucianna Cananà & Luigi De Cesare & Massimiliano Ferrara, 2022. "Advances in Financial Leasing Mechanism Designs," Mathematics, MDPI, vol. 11(1), pages 1-10, December.
    • Handle: RePEc:gam:jmathe:v:11:y:2022:i:1:p:87-:d:1015018
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    References listed on IDEAS

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    1. Lin, Jane-Raung & Wang, Chia-Jane & Chou, De-Wei & Chueh, Fei-Chun, 2013. "Financial constraint and the choice between leasing and debt," International Review of Economics & Finance, Elsevier, vol. 27(C), pages 171-182.
    2. Marco Realdon, 2006. "Pricing the Credit Risk of Secured Debt and Financial Leasing," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 33(7-8), pages 1298-1320.
    3. Myers, Stewart C & Dill, David A & Bautista, Alberto J, 1976. "Valuation of Financial Lease Contracts," Journal of Finance, American Finance Association, vol. 31(3), pages 799-819, June.
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    7. Marco Realdon, 2006. "Pricing the Credit Risk of Secured Debt and Financial Leasing," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 33(7‐8), pages 1298-1320, September.
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    Cited by:

    1. Luigi De Cesare & Lucianna Cananà & Tiziana Ciano & Massimiliano Ferrara, 2024. "Modeling financial leasing by optimal stopping approach," Decisions in Economics and Finance, Springer;Associazione per la Matematica, vol. 47(1), pages 199-213, June.

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