Consider a lease agreement recently offered by a car dealership. The agreement gives the customer the right to use a new SUV for 4 years in exchange for payments of $650 per month. At the end of the lease, the customer can choose to purchase the SUV for $18,000. What sort of option does this resemble?

Question

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This lease agreement resembles a call option because the customer has the option to purchase the SUV at the end of the lease for a set price of $18,000. The customer is not obligated to purchase the SUV, but has the option to do so if they choose. The monthly payments can be thought of as the premium paid for the option to use the SUV during the lease term.

Consider a Lease Agreement Recently Offered by a Car Dealership