Valuing the purchase option on car leasing contracts

Abstract

This thesis studies the role of the residual value in financial leasing contracts, using the real options methodology to provide a valuation of the purchase option embedded in these contracts. Using a sample of used cars, I arrive at a cost to lessor between 1% and 12.2% of the loan amount for contracts with maturities between one and ten years, conducting separate analyses for Diesel and Petrol engines. The sensitivity analyses reveals positive impact of interest rate and reference price on the cost to lessor. The alternative of setting residual value equal to expected market value is less costly to the lessor but does not comply with the purpose of finance leases.

Date of Award	19 Feb 2014
Original language	English
Awarding Institution	Universidade Católica Portuguesa
Supervisor	Ricardo Reis (Supervisor)