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A Value-Based Approach to Option Pricing: The Case of Supply Chain Options

In: Contract Analysis and Design for Supply Chains with Stochastic Demand

Author

Listed:
  • Yingxue Zhao

    (University of International Business and Economics)

  • Xiaoge Meng

    (Beijing University of Aeronautics and Astronautics)

  • Shouyang Wang

    (Academy of Mathematics and Systems Science)

  • T. C. Edwin Cheng

    (The Hong Kong Polytechnic University)

Abstract

Chapter 6 explores the pricing issue for supply chain options. In classical research, this issue is generally considered in the Stackelberg game framework. Such a pricing scheme, however, is usually unacceptable to the follower since the leader always captures all the surplus derived from the options. Being different from the existing literature, this chapter develops a value-based pricing scheme for supply chain options with two modeling scenarios including a single retailer and multiple retailers. The intuition behind such a pricing scheme is to price the option based on the value inherent in the option right. As shown in the research, such a pricing scheme can assure that each of the contracting partners captures a share of the surplus derived from the options. As a result, the pricing schemes developed in this chapter are more objective and fair and consequently are more likely to be accepted by the contracting partners as compared with those that follow the Stackelberg game approach.

Suggested Citation

  • Yingxue Zhao & Xiaoge Meng & Shouyang Wang & T. C. Edwin Cheng, 2016. "A Value-Based Approach to Option Pricing: The Case of Supply Chain Options," International Series in Operations Research & Management Science, in: Contract Analysis and Design for Supply Chains with Stochastic Demand, edition 1, chapter 0, pages 131-143, Springer.
    • Handle: RePEc:spr:isochp:978-1-4899-7633-8_6
    DOI: 10.1007/978-1-4899-7633-8_6
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