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https://scholarbank.nus.edu.sg/handle/10635/113968
Title: | A real option approach to pricing embedded options in retail leases | Authors: | Sing, T.F. | Keywords: | Default risks Option pricing model Percentage lease agreements (PLAs) |
Issue Date: | Sep-2012 | Citation: | Sing, T.F. (2012-09). A real option approach to pricing embedded options in retail leases. Pacific Rim Property Research Journal 18 (3) : 197-211. ScholarBank@NUS Repository. | Abstract: | Percentage lease agreements (PLAs) contain lease clauses with payments of a flat base rent plus a variable rent, which is pegged to sales turnover. This paper applies a multi-period binomial tree option-pricing model to value default options in PLAs. In the absence of penalties on lease pretermination, tenants have an implicit call option, if exercised, giving them a right to "break" a lease and move to alternative premises at a lower prevailing market rent. Using a hypothetical PLA lease defined by key input parameters, the value of the tenants' default option is estimated at 1.08% for a 3-year PLA lease. When sales turnover and relocation costs are simulated using selected random probability processes, the expected option premiums increase by 0.18% to 1.26%. The levels of base rent and the overage rate are positively related with option premiums. The option premiums, however, decline when relocation costs and sale breakpoint increase. | Source Title: | Pacific Rim Property Research Journal | URI: | http://scholarbank.nus.edu.sg/handle/10635/113968 | ISSN: | 14445921 |
Appears in Collections: | Staff Publications |
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