Pricing and net profit of operating lease

Abstract

Purpose

The purpose of this paper is to investigate how asset risk (i.e. the risk that the value of the leased asset loses unexpectedly most of its value at the end of the contract) is measured and hedged.

Design/methodology/approach

The evaluation of the lease contract is achieved by applying the theory of option pricing as the lessor is the writer of a call option on the leased asset. A sensitivity analysis on some parameters is performed.

Findings

The paper disentangles the components of the profit of a lease contract and allows to choose the optimal final purchase price. This lets the lessor hedge against asset risk.

Research limitations/implications

The paper's result can be extended by considering more complex options (such as American or exotic ones) into the lease contract.

Practical implications

Results in the paper allow for a more flexible and efficient management of lease contracts where both parties benefit under an economic and a financial point of view.

Originality/value

This is believed to be the first paper that applies derivative evaluation to the analysis of lease contracts.

Citation

Moretto, E. and Tagliavini, G. (2009), "Pricing and net profit of operating lease", Managerial Finance, Vol. 35 No. 10, pp. 828-840. https://doi.org/10.1108/03074350910984700