The Effects of Financial Risks on Inventory Policy

Peter Berling () and Kaj Rosling ()
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Peter Berling: Department of Industrial Management and Logistics, Lund University, P.O. Box 118, SE-221 00 Lund, Sweden
Kaj Rosling: School of Technology and Design, Växjö University, SE-351 95 Växjö, Sweden

Management Science, 2005, vol. 51, issue 12, 1804-1815

Abstract: The effect of financial risks on (R, Q) inventory policies is analyzed in a real options framework. Simple adjustments of the usual formulas for R and Q are suggested and tested. Stochastic demand and purchase costs are considered, both with known systematic (business-cycle-related) risk. The systematic risk of stochastic demand has typically a negligible effect on the optimal values of R and Q, although an improvement may be achieved by a simple adjustment of R. The systematic risk of the purchase price, c, has a significant effect on R and Q. The capital holding cost should be estimated as r \cdot c, where r is the sum of the risk-free interest rate, the expected price decrease, and the risk premium associated with the systematic risk of c. For goods quoted on commodity exchanges, r may be estimated directly from the prices on forward contracts. Its size (and sign) varies considerably for different commodities.

Keywords: inventory control; inventory costing; capital cost and real options (search for similar items in EconPapers)
Date: 2005
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Citations: View citations in EconPapers (26)

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