Contingent Claims Contracting for Purchasing Decisions in Inventory Management

Peter H. Ritchken and Charles S. Tapiero
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Peter H. Ritchken: Case Western Reserve University, Cleveland, Ohio
Charles S. Tapiero: Case Western Reserve University, Cleveland, Ohio

Operations Research, 1986, vol. 34, issue 6, 864-870

Abstract: Option pricing is a common and important practice in the financial community, and has become a fundamental theoretical construct in financial economics. The theory is quite rich and has potential uses in many other problem domains. This paper develops a variant of the theory as applied to inventory planning. In particular, we consider a risk management approach that uses negotiated option contracts for hedging against price and quantity uncertainty in inventory procurement. We derive conditions for the inclusion of options in inventory control as a function both of managerial attitudes toward risk and of the correlation between price and demand.

Keywords: 332 hedging price and quantity uncertainty with options; 362 dynamic program for inventory order quantities; 855 purchasing decisions under quadratic rank aversion (search for similar items in EconPapers)
Date: 1986
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Persistent link: https://EconPapers.repec.org/RePEc:inm:oropre:v:34:y:1986:i:6:p:864-870

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