The lessor usually calculates the periodic payments based upon the amount of the investment that will be recovered. The equation would be that the investment is equal to the present value of the payments plus the present value of the residual value (guaranteed or un-guaranteed).

A bond's time to maturity is positively related to the elasticity of the bond's price with respect to changes in its required return. A bond's coupon rate is inversely related to the elasticity of the bond's price with respect to changes in its required return. The upside potential of a reduction in required return is less for a callable bond than for a similarly defined option-free bond.

Note that the significance level is the same as the probability of making a Type I error. A
Type I error refers to the event that we will reject the null when, in fact, it is true. Clearly, lower significance levels are better, all else equal.

CT = MAX(0, ST - X) = MAX(0, 62.75 - 60) = MAX (0. 2.75) = 2.75

Sellers of such a commodity attempt to hedge again the risk of lower spot prices which could drive them out of business.