Giacomo De Laurentis and Jacopo Mattei
The purpose of this paper is to verify recovery risk management capabilities by lessors. It tests several hypotheses and finds out interesting specific results for lessors.
Abstract
Purpose
The purpose of this paper is to verify recovery risk management capabilities by lessors. It tests several hypotheses and finds out interesting specific results for lessors.
Design/methodology/approach
The approach is empirical: two different database of leasing contracts are analysed with econometric methodologies.
Findings
There is clear evidence that: lessors are ex ante able to balance the probability of default and the loss given default case by case, using proper contract structures; and they carefully manage recovery procedures and strategies according to operations' characteristics.
Research limitations/implications
The data used are large enough, but come from institutions concentrated in Italy. Future research could be extended to other relevant countries.
Practical implications
Results presented are verified in leasing companies which made a limited use of rating systems and credit risk model: they have been achieved by the continuous improvements of traditional lending practices. The development of modern reliable systems can enhance risk management capabilities; our findings can help building more structured and advanced credit risk management tools.
Originality/value
The paper adds to the literature in the sense that gives clear evidence of a neglected but important fact of real world credit markets: financial intermediaries have the capability of properly assessing risk components and manage loss given default (LGD) in order to control overall credit risk.
Details
Keywords
Enrico Moretto and Giulio Tagliavini
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…
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.