Flexible lease contracts in the fleet replacement problem with alternative fuel vehicles: A real-options approach

We study the use of flexible lease contacts in the fleet portfolio management problem of a firm that aims to minimize its cost and risk (Recursive Expected Conditional Value at Risk), simultaneously, in a stochastic multi-period setting by deciding which technologies to use in its fleet. We propose a model using real options (return and swap) to model contract flexibility and to account for different uncertainties (CO2 prices, fuel prices, mileage covered by a vehicle, fuel consumption, and technological). We analyse how fuel price uncertainty and technological progress influence the value of the options. We validate the results using a real-world case study conducted in the UK.