A Contingent-Claim Interpretation of Leases on Real Assets

Abstract

Real estate leases often contain contingent rights that may accrue to either the lessee or the lessor. This paper looks at how these contingent claims can be viewed as the equivalent of exchange traded, and over-the-counter, derivative instruments. It is shown that with this equivalence the potential for derivatives written on real estate represents a major market opportunity for these contracts. The paper also briefly examines how the underlying asset price may be measured, which has been the primary impediment to the development of a real estate derivatives market.