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Contingent Claims Contracting for Purchasing Decisions in Inventory Management

Author

Listed:
  • Peter H. Ritchken

    (Case Western Reserve University, Cleveland, Ohio)

  • Charles S. Tapiero

    (Case Western Reserve University, Cleveland, Ohio)

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.

Suggested Citation

  • Peter H. Ritchken & Charles S. Tapiero, 1986. "Contingent Claims Contracting for Purchasing Decisions in Inventory Management," Operations Research, INFORMS, vol. 34(6), pages 864-870, December.
    • Handle: RePEc:inm:oropre:v:34:y:1986:i:6:p:864-870
    DOI: 10.1287/opre.34.6.864
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