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Hedging residual value risk using derivatives

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  • Sylvain Prado

    (EconomiX - EconomiX - UPN - Université Paris Nanterre - CNRS - Centre National de la Recherche Scientifique)

Abstract

In the leasing industry the lessor faces a risk, at the end of the contract, in not recovering su¢ cient 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.

Suggested Citation

  • Sylvain Prado, 2009. "Hedging residual value risk using derivatives," Working Papers hal-04140859, HAL.
    • Handle: RePEc:hal:wpaper:hal-04140859
    Note: View the original document on HAL open archive server: https://hal.science/hal-04140859
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    References listed on IDEAS

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    1. Davide Meneguzzo & Walter Vecchiato, 2004. "Copula sensitivity in collateralized debt obligations and basket default swaps," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 24(1), pages 37-70, January.
    2. 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.
    3. M.Ameziane Lasfer & Mario Levis, 1998. "The Determinants of the Leasing Decision of Small and Large Companies," European Financial Management, European Financial Management Association, vol. 4(2), pages 159-184, July.
    4. Merton, Robert C, 1974. "On the Pricing of Corporate Debt: The Risk Structure of Interest Rates," Journal of Finance, American Finance Association, vol. 29(2), pages 449-470, May.
    5. Schmit, Mathias, 2004. "Credit risk in the leasing industry," Journal of Banking & Finance, Elsevier, vol. 28(4), pages 811-833, April.
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