Option pricing for inventory management and control

Authors:
Bryant Angelos;McKay Heasley;Jeffrey Humpherys
Affiliations:
Department of Mathematics, Brigham Young University, Provo, UT;Department of Mathematics, Brigham Young University, Provo, UT;Department of Mathematics, Brigham Young University, Provo, UT
Venue:
ACC'09 Proceedings of the 2009 conference on American Control Conference
Year:
2009

Citing 2
Cited 0

Option Pricing with Downward-Sloping Demand Curves: The Case of Supply Chain Options

Management Science
Dynamic Programming and Optimal Control, Vol. II

Dynamic Programming and Optimal Control, Vol. II

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Abstract

We explore the use of option contracts as a means of managing and controlling inventories in a retail market. Specifically, merchants can buy option contracts on unsold inventories of retail goods in an effort to hedge, pool, or transfer risk. We propose a new kind of European put option on an inventory where the holder is allowed to freely adjust the original sale price of the underlying good throughout the contract period as a means of controlling demand. Assuming the retailer will chose the profit maximizing pricing policy, we can price the option accordingly.