Hedging residual value risk using derivatives
Abstract: In the leasing industry the lessor faces a risk, at the end of the contract, in not recovering sufficient capital value from resale of the asset. We propose a model to hedge residual value risk using the Gaussian copula methodology. After discussing residual value risk and credit risk modelization, a new derivative product is introduced and analyzed; the Collateralized Residual Values (CRV). The model is applied to an European auto lease portfolio of operating lease contracts pertaining to a major company. Our results indicate that the financial product is easy to customize, and to implement through the contract characteristics and the level of correlation.
|Date of creation:||2009|
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- Mathias Schmit, 2003.
"Is Automotive Leasing a Risky Business?,"
Working Papers CEB
03-009.RS, ULB -- Universite Libre de Bruxelles.
- Schmit, Mathias, 2004. "Credit risk in the leasing industry," Journal of Banking & Finance, Elsevier, vol. 28(4), pages 811-833, April.
- Philipp J. Schönbucher, 2000. "Factor Models for Portofolio Credit Risk," Bonn Econ Discussion Papers bgse16_2001, University of Bonn, Germany.
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- Merton, Robert C, 1974.
"On the Pricing of Corporate Debt: The Risk Structure of Interest Rates,"
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American Finance Association, vol. 29(2), pages 449-70, May.
- Merton, Robert C., 1973. "On the pricing of corporate debt: the risk structure of interest rates," Working papers 684-73., Massachusetts Institute of Technology (MIT), Sloan School of Management.
- Hugues Pirotte & Mathias Schmit & Céline Vaessen, 2004. "Credit risk mitigation evidence in auto leases: LGD and residual value risk," Working Papers CEB 04-008.RS, ULB -- Universite Libre de Bruxelles.
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