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by Robert F. Cunningham
Fall 2001 Issue

A continuing development in corporate finance has been the sophisticated risk management methodologies involving credit enhancement, hedging through derivative securities,and techniques and structures such as securitization for improved liquidity. This paper presents a brief economic and financial analysis of the developing secondary market for lease assumption,focusing on the incentive structure and the underlying rationale for a secondary market. The enhanced optionality and liquidity that this advance in the state of the art permits has the potential to create value for all market participants and, in particular, significant risk management benefits for lessors. Some recent analytic work has fruitfully applied the general framework of options technology to the equipment leasing sector. Leasing firms and other participants in the leasing sector can be thought of as holding and exchanging various bundles of options and contingent claims against both real and financial assets. These include mid-term and end-of-term residual values, interest rates, issuer credit, term duration, and tax benefits.