Pricing the Right to Renew House Lease Contracts Using the Black-Scholes Option Pricing Model

Abstract

The right to renew house lease contracts, introduced with the amendment of the Housing Lease Protection Act in July 2020, refers to the right to renew the lease contract only if the lessee wishes to do so upon expiration of the initial lease contract. This study presents Korea’s first model that can directly evaluate the appropriate value of this right to renew house lease contracts. Specifically, this study presents a pricing model using the Black-Scholes model focusing on the characteristics of the renewal right as a call option. Unlike general stock options, these renewal rights are not traded separately in the market, so a model in which the value of renewal contract is included in the chonsei price is also presented. Subsequently, this model is expanded and examined wherein the chonsei price can be increased at a certain rate when the contract is renewed. In addition, the numerical results are presented by applying the baseline parameter values, although they largely depend on the volatility of the chonsei price.