Commodity options purchasing and credit financing under capital constraint

Yi Feng, Yinping Mu, Benyong Hu and Arun Kumar

International Journal of Production Economics, 2014, vol. 153, issue C, 230-237

Abstract: This paper investigates a purchasing contract with options under capital constraint and credit support from a financial institution. The buyer, who has limited capital, can buy commodity options and a fixed order, and choose to exercise all or part of the options at a later time. We characterize the buyer׳s optimal ordering strategy with limited capital. There is one critical value for the capital; that is, the buyer will only purchase a fixed order when the capital is less than the value. With more capital, the buyer will reduce the fixed order quantity and increase the option orders until the capital is used up or the global optimization is reached. This result implies that the option is a risk-hedging tool only for easy finance companies. Furthermore, we find that when the buyer obtains funding from a financial institution such as a bank, the buyer׳s profit will be increased with bank financing, and the buyer׳s optimal purchasing decision will follow the similar policy and order less options and more fixed orders compared with the case when there is sufficient capital. Numerical examples are provided to demonstrate the theoretical results.

Keywords: Decision analysis; Commodity options; Capital constraint; Credit financing (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (16)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0925527314000838
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:proeco:v:153:y:2014:i:c:p:230-237

DOI: 10.1016/j.ijpe.2014.03.003

Access Statistics for this article

International Journal of Production Economics is currently edited by Stefan Minner

More articles in International Journal of Production Economics from Elsevier
Bibliographic data for series maintained by Catherine Liu ().