EVALUATING LEASES WITH COMPLEX OPERATING OPTIONS

The paper deals with the numerical valuation of leasing contracts with a variety of embedded operating options. Unlike earlier work which ei ther ignores such options or focuses on only one type of operating opt ion in isolation, this paper recognizes that leasing is a context in w hich complex options typically occur as well as the importance of usin g computational methods to quantify the interactions among several opt ions present in combination. It describes a Contingent Claims Analysis (CCA) of operating lease options, and suggests a CCA-based numerical analysis method for valuing leasing contracts with multiple such optio ns. A numerical leasing example with the options to cancel the lease e arly, extend its life, and purchase the leased asset is presented for illustration.