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Yes and no
Posted by Geoff [Email] (more from Geoff) on Mon, 16 Aug 2004 15:13:20
In Reply to: Re: Residual "insurance", Rafe, Mon, 16 Aug 2004 13:50:50
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Nothing is 100% certain. Residuals are estimated when the contract begins. Lots of things can move for or against the lessor during the term of the lease - gas prices, economic conditions, interest rates, competitive forces, etc.
I don't think you can call this kind of residual value insurance a derivative*, but there is a simple option imbedded in your lease - SFSC has sold you a call option that gives you the right to buy the car at a stated value on the last day. If that call is out of the money (comparable car can be bought cheaper), then the option expires unused. Since the premium (cost) for that option was priced into the original lease terms, which you paid, you lose. If the option is in the money (comparable car is more expensive), then you exercise it and SFSC loses. SFSC can choose to allocate part of the option premium (your money) against the cost of some residual insurance. Or they can keep the money and cross their fingers.
A change in contingent liabilities is an off-balance sheet item for a bank or finance company, and has no effect on earnings. May be different for the insurer, but I don't know about insurance company financial statements. I'm only a banker.
/Geoff
* Technical explanation: The residual insurance ensures against the risk of changes in the fair value of the car at lease-end. This has a financial component (changes in fair market value of that class of asset) and a non-financial component (the condition of your specific vehicle relative to other similar cars - dents, wear and tear, etc.). The second aspect (variability of physical condition) disqualifies the insurance from accounting treatment as a financial derivative.
posted by 216.52.215...
Posts in this Thread:
- end of lease negotiation?, RC, Mon, 16 Aug 2004 07:44:12
- Re: end of lease negotiation?, George, Mon, 16 Aug 2004 14:43:41
- Case by case....., Mike Lynch
, Mon, 16 Aug 2004 13:29:27 - Re: end of lease negotiation?, jasonlk, Mon, 16 Aug 2004 13:09:17
- Residual insurance, Geoff, Mon, 16 Aug 2004 07:51:47
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