Abstract
This paper considers the rising price and the shrinking demand caused by the inflation. To manage these above risks, the firm has a chance to place two types of orders in each period, viz., the firm order and the put options order. This paper formulates a multiperiod ordering model, either without or with put option contracts. Based on stochastic dynamic programming, this paper studies the optimal ordering policy structure in each period and provides an approximation to evaluate the corresponding policy parameters. By taking the case without put option contracts as a benchmark, put option contracts are demonstrated to prompt the firm to enhance the service level and improve the performance.
Highlights
If you often visit supermarkets to do some shopping, you can observe that the price levels of fruits, vegetable and meat have been going up at a fast pace
The consumer confidence hits rock bottom and the market demand becomes sluggish under inflation
We mainly focus on put option contracts
Summary
If you often visit supermarkets to do some shopping, you can observe that the price levels of fruits, vegetable and meat have been going up at a fast pace. People must afford more money to buy the same goods and so almost everyone has to tighten his belt in fear of what could lie ahead For this reason, the consumer confidence hits rock bottom and the market demand becomes sluggish under inflation. To accommodate the rapidly changing market, more and more firms start to adopt option contracts to manage various types of uncertainties, including yield, demand and price. Two important questions are addressed in this paper: With and without put option contracts, what is the firm’s optimal ordering policy in each period under inflation?. The firm’s multiperiod ordering policies without and with put option contracts are analyzed in section 4 and 5, respectively.
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