RT Journal Article
SR Electronic
T1 Residual Risk and the Valuation of Leases Under Uncertainty and Limited Information
JF The Journal of Structured Finance
FD Institutional Investor Journals
SP 37
OP 49
DO 10.3905/jsf.2002.320265
VO 7
IS 4
A1 David C. Rode
A1 Paul S. Fischbeck
A1 Steve R. Dean
YR 2002
UL https://pm-research.com/content/7/4/37.abstract
AB 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.