CONTINGENT CLAIMS CONTRACTING FOR PURCHASING DECISIONS IN INVENTORY MANAGEMENT.

Peter H. Ritchken, Charles S. Tapiero

Research output: Contribution to journalArticle

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.

Original languageEnglish (US)
Pages (from-to)864-870
Number of pages7
JournalOperations Research
Volume34
Issue number6
DOIs
StatePublished - Jan 1 1986

ASJC Scopus subject areas

  • Computer Science Applications
  • Management Science and Operations Research

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