Eres : Digital Library : Works

Paper eres2015_57:
The pricing of embedded lease contracts options

id eres2015_57
authors Amédée-Manesme, Charles-Olivier; François des Rosiers; Philippe Grégoire
year 2015
title The pricing of embedded lease contracts options
source 22nd Annual European Real Estate Society Conference in Istanbul, Turkey
summary In all the major asset class, implied volatility is obtained from the quotations of the derivatives market. However, in real estate, derivatives market is almost inexistent and volatility pricing face many difficulties. This paper proposes a methodology to determine implied volatility of real estate market based on options embedded in lease contracts. Leases are generally agreed for long term with possible options to leave in favour of the tenant during the course of the lease. Tenants that have no break-options during the life of their lease expect either to pay a lower rent or to receive more gratuities (rent free, financial incentives...) than those with options to leave. We built up a model that allows estimating implied volatility based on the leasing transactions by analogy between lease options and financial options.
keywords lease structure, implied volatility, risk
series ERES:conference
type paper session
email charles-olivier.amedee-manesme@fsa.ulaval.ca
discussion No discussions. Post discussion ...
ratings
session Real Estate Portfolio Management
last changed 2015/07/08 18:06
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