Contingent convertible lease modeling and credit risk management

Abstract The main objective of this study is to determine a lease agreement finance an investment project and solution for managing credit risk. This investigates three types contingent leases reduce the costs associated with bankruptcy compensate lessor's position. A leasing defaultable contract allows lessor obtain rent that will be recovered if lessee defaults. convertible can automatically converted into shares when certain default conditions related cash flows generated by firm are met. These triggered ratio firm's value payments. Defaultable-Convertible-Leasing payback option grants right but not obligation convert remaining payments stocks or break up pick rented equipment reaches threshold. contracts motivated contributing range risk-management strategies adding more flexibility standard rents. Closed-form securities pricing solutions set forward in dynamic model firms existing assets growth financed lease. Risk-neutral theory backward induction method used corporate securities. Numerical analysis shows defaultable-convertible options impact service leased asset, maturity, inefficiencies resulting from insolvency asset substitution. An optimal conversion rate reduces inefficiencies, thus making defaultable-convertible-leasing reliable ensure business continuity loss coverage leasers upon default.