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Option Contract Design and Risk Analysis: Supplier’s Perspective

Author

Listed:
  • Yi Feng

    (School of Management and Economics, University of Electronic Science and Technology of China, Chengdu, Sichuan 610054, P. R. China)

  • Qing Wu

    (School of Management and Economics, University of Electronic Science and Technology of China, Chengdu, Sichuan 610054, P. R. China)

Abstract

We examine an option contract from a supplier’s perspective and apply mean-variance method to analyze the supplier’s risk. Compared with the newsvendor model without an option contract, we theoretically prove that the option contract can also benefit the supplier. We find for a given option exercise price, there exists an option price such that the contract with the option price dominates those with smaller option price in terms of mean variance of the supplier’s profit. Computational studies have also been conducted in the paper.

Suggested Citation

  • Yi Feng & Qing Wu, 2018. "Option Contract Design and Risk Analysis: Supplier’s Perspective," Asia-Pacific Journal of Operational Research (APJOR), World Scientific Publishing Co. Pte. Ltd., vol. 35(03), pages 1-13, June.
    • Handle: RePEc:wsi:apjorx:v:35:y:2018:i:03:n:s0217595918500173
    DOI: 10.1142/S0217595918500173
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    References listed on IDEAS

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    Cited by:

    1. Fan, Yinghua & Feng, Yi & Shou, Yongyi, 2020. "A risk-averse and buyer-led supply chain under option contract: CVaR minimization and channel coordination," International Journal of Production Economics, Elsevier, vol. 219(C), pages 66-81.

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