Evaluating leases with complex operating options

Abstract

The paper deals with the numerical valuation of leasing contracts with a variety of embedded operating options. Unlike earlier work which either ignores such options or focuses on only one type of operating option in isolation, this paper recognizes that leasing is a context in which complex options typically occur as well as the importance of using computational methods to quantify the interactions among several options present in combination. It describes a Contingent Claims Analysis (CCA) of operating lease options, and suggests a CCA-based numerical analysis method for valuing leasing contracts with multiple such options. A numerical leasing example with the options to cancel the lease early, extend its life, and purchase the leased asset is presented for illustration.