Including Real Options in Evaluating Terminal Cash Flows in Consumer Auto Leases

Authors

  • Pete Oppenheimer Department of Business Administration, North Georgia College and State University

DOI:

https://doi.org/10.61190/fsr.v11i2.4728

Keywords:

Automobile, Consumer finance, Discounted cash flow, Leasing, Options

Abstract

Leasing has become a popular method of financing automobile acquisitions. According to White (2001), consumers now acquire a majority of luxury automobiles using lease financing. Traditional lease analysis ignores the value of options embedded in the lease that affect the terminal cash flows. This paper shows that the terminal cash flows from an automobile lease should be viewed as a call option and several put options, each containing different exercise prices. The paper contains data to assist in empirically estimating the values of these options at the end of an automobile lease. Results show that ignoring the interplay of option values at the end of the lease may lead to costly financing decisions by the consumer.

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Published

2002-06-30

How to Cite

Oppenheimer, P. (2002). Including Real Options in Evaluating Terminal Cash Flows in Consumer Auto Leases. Financial Services Review, 11(2), 135–151. https://doi.org/10.61190/fsr.v11i2.4728

Issue

Vol. 11 No. 2 (2002): FSR Summer 2002

Section

New Original Submission

License

Copyright (c) 2002 Academy of Financial Services

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