Pricing Rent-to-Own Options with a Barrier Level: Taking Housing Contracts as an Example

Abstract

Abstract How to effectually price a rent-to-own option embedded a barrier level? This question is an important issue in financial market. For the purpose, we use the boundary integral method of PDE to derive a closed-form approximate solution of the rent-to-own option embedded a barrier level, where the tenant has the right to buy a specified rental house during the duration of contract. This study finds several characteristics through a sequence of numerical analyses and provides an available method for pricing rent-to-own options taking housing contracts with a barrier level as an example. This paper is original research in pricing a rent-to-own option using a boundary integral method and provides a reference to financial market about the valuation of a rent-to-own option embedded a barrier level well. JEL classification numbers: C02, G13. Keywords: Rent-to-own option, Boundary integral method, Green’s function.