Financial Decisions - Document Index

Valuation of Lease Contracts In Continuous Time

With Stochastic Asset Values

Riaz Hussain

The University of Scranton

Abstract

A lease is a derivative security the value of which depends upon the value of the underlying asset. Using contingent-claim analysis, this paper evaluates different lease contracts. The value of the lease depends upon the options embedded in the lease contract. Results for three special cases are derived and illustrated when it is assumed that the value of the underlying asset decreases linearly with time but in a stochastic environment.