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The Journal of Structured Finance

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Primary Article

Residual Risk and the Valuation of Leases Under Uncertainty and Limited Information

David C. Rode, Paul S. Fischbeck and Steve R. Dean
The Journal of Structured Finance Winter 2002, 7 (4) 37-49; DOI: https://doi.org/10.3905/jsf.2002.320265
David C. Rode
Director of quantitative analysis in the Decision Analysis Group at DAI Management Consultants, Inc. in Bridgeville, PA.
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  • For correspondence: drode@daimc.com
Paul S. Fischbeck
An associate professor in the Department of Social and Decision Sciences at Carnegie Mellon University in Pittsburgh, PA.
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  • For correspondence: pf12@andrew.cmu.edu
Steve R. Dean
President of DAI Management Consultants, Inc. in Bridgeville, PA.
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  • For correspondence: sdean@daimc.com
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Abstract

For a variety of tax, accounting, and economic reasons, leasing has become an enormously popular method of financing the acquisition of capital assets. The explosion in lease finance, however, has left many lessors exposed to substantial risks in the form of uncertainty over the residual values of the leased assets. Residual value risk has already led to substantial losses for a number of institutions in such well-established asset markets as automobiles. The extension of lease financing to more exotic assets thus presents a substantial challenge to the leasing industry's ability to identify and manage residual risks. This article presents a simulation framework for valuation of residual risks that is consistent with contemporary appraisal practice, but also explicitly recognizes the impact of uncertainty on residual values.

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The Journal of Structured Finance
Vol. 7, Issue 4
Winter 2002
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Residual Risk and the Valuation of Leases Under Uncertainty and Limited Information
David C. Rode, Paul S. Fischbeck, Steve R. Dean
The Journal of Structured Finance Jan 2002, 7 (4) 37-49; DOI: 10.3905/jsf.2002.320265

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Residual Risk and the Valuation of Leases Under Uncertainty and Limited Information
David C. Rode, Paul S. Fischbeck, Steve R. Dean
The Journal of Structured Finance Jan 2002, 7 (4) 37-49; DOI: 10.3905/jsf.2002.320265
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