Contingent Claims Contracting for Purchasing Decisions in Inventory Management

Operations Research · 1986 · Volume 34 · Issue 6

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

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