VALUING LEASE CONTRACTS - A REAL-OPTIONS APPROACH

Using a real-options approach to endogenously derive the entire term structure of lease rates, I develop a unified framework for pricing a wide variety of leasing contracts. The structure of the model is analogous to traditional models of the term structure of interest rates. I show how the model is flexible enough to determine equilibrium lease rates for leases of any term and practically any structure, including forward leases, leases with options to renew or cancel, lease insurance contracts, adjustable-rate leases, and leases with payments contingent on asset usage.