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Real options valuation principle in the multi-period base-stock problem

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Author

Summary, in English

This paper analyzes the multi-period base-stock problem where there is a financial risk associated with a stochastic demand. For the single-period problem, it is known that the optimal inventory policy can be obtained with the Black and Scholes option pricing formula. This paper pushes the analysis further by applying the options valuation framework to the multi-period problem and presenting an algorithm for finding the optimal inventory policy. A computational study indicates that the effect of systematic risk is typically negligible (as for the single-period problem). Therefore, it can be concluded that systematic risk in demand is of little importance for optimal inventory control.

Publishing year

2008

Language

English

Pages

1086-1095

Publication/Series

Omega: the International Journal of Management Science

Volume

36

Issue

6

Document type

Journal article

Publisher

Elsevier

Topic

  • Transport Systems and Logistics

Keywords

  • cost benefit analysis newsboy problem
  • inventory theory
  • risk

Status

Published

ISBN/ISSN/Other

  • ISSN: 0305-0483