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Inventory Decision under Demand Uncertainty: A Contingent Claims Approach

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  • Chung, Kee H

Abstract

This study uses the discrete-time option pricing model for the evaluation of the firm's inventory decision under demand uncertainty. The paper establishes the following optimal inventory decision implications: the optimal order quantity is positively related to the product selling price, product salvage value, interest rate, and the size of the outstanding orders; and negatively related to the product cost. The effect of demand uncertainty on the optimal order quantity is shown to be ambiguous. This study also shows that the maximum present value of profit from the contingent claims approach can be substantially different from that of the modified standard newsboy problem. Copyright 1990 by MIT Press.

Suggested Citation

  • Chung, Kee H, 1990. "Inventory Decision under Demand Uncertainty: A Contingent Claims Approach," The Financial Review, Eastern Finance Association, vol. 25(4), pages 623-640, November.
    • Handle: RePEc:bla:finrev:v:25:y:1990:i:4:p:623-40
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    Cited by:

    1. Tannous, George F. & Mangiameli, Paul M., 1996. "Adding features to a product: A micro-economic model," International Review of Economics & Finance, Elsevier, vol. 5(2), pages 149-173.
    2. James A. Yunker & Dale Schofield, 2005. "Pricing training and development programs using stochastic CVP analysis," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 26(3), pages 191-207.
    3. Lander, Diane M. & Pinches, George E., 1998. "Challenges to the Practical Implementation of Modeling and Valuing Real Options," The Quarterly Review of Economics and Finance, Elsevier, vol. 38(3, Part 2), pages 537-567.
    4. Bardia Kamrad & Keith Ord, 2006. "Market risk and process uncertainty in production operations," Naval Research Logistics (NRL), John Wiley & Sons, vol. 53(7), pages 627-640, October.
    5. Soumyatanu Mukherjee & Sidhartha S. Padhi, 2022. "Sourcing decision under interconnected risks: an application of mean–variance preferences approach," Annals of Operations Research, Springer, vol. 313(2), pages 1243-1268, June.
    6. Lin, Chun-Ta & Chen, Yee Ming, 2009. "Hedging strategic flexibility in the distribution optimization problem," Omega, Elsevier, vol. 37(4), pages 826-837, August.
    7. Peter Berling & Kaj Rosling, 2005. "The Effects of Financial Risks on Inventory Policy," Management Science, INFORMS, vol. 51(12), pages 1804-1815, December.
    8. Berling, Peter, 2008. "Real options valuation principle in the multi-period base-stock problem," Omega, Elsevier, vol. 36(6), pages 1086-1095, December.
    9. Zheng, Yanyan & Zhao, Yingxue & Wang, Nengmin & Meng, Xiaoge & Yang, Honglin, 2022. "Financing decision for a remanufacturing supply chain with a capital constrained retailer: A study from the perspective of market uncertainty," International Journal of Production Economics, Elsevier, vol. 245(C).
    10. Inderfurth, Karl & Schefer, Rainer, 1996. "Analysis of order-up-to-S inventory policies under cash flow market value maximization," International Journal of Production Economics, Elsevier, vol. 46(1), pages 323-338, December.

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