Abstract
This paper considers the procurement mechanism with two supply channels, namely, an option contract purchase and a spot market. For the mechanism, under the stochastic demand and the stochastic spot price, we consider the portfolio procurement with the spot trading liquidity and the option speculation respectively. To maximize the buyer’s profit, we establish two optimal portfolio procurement strategy models for those two scenarios. Based on the buyer’s cost-benefit analysis, we present a solution method to each model and provide an optimal ordering policy to the buyer. By the obtained results, we analyze the role of the spot trading liquidity and option speculation in a buyer’s expected profit. Some numerical experiments are presented to show the validity of the formulated models.
Highlights
As an important supplement to the e-commerce, the spot market with the stochastic spot price plays an important role in commodity trading
In China, there are more than 200 spot markets providing spot trading of bulk commodities, and up to 60% of iron ore is purchased from the spot market [1]
The portfolio procurement strategy which combines the supply contract and spot market is generated to cope with the stochastic demand and the stochastic spot price
Summary
As an important supplement to the e-commerce, the spot market with the stochastic spot price plays an important role in commodity trading. Lee et al [8] considered the portfolio procurement with the significant demand and spot price volatility and showed that the profit is higher for the spot market than for the long-time contract. Under the stochastic demand and the stochastic spot price, we, respectively, consider the spot market with the spot trading liquidity and with the option speculation. For this setting, to maximize the buyer’s profit, we construct two optimal portfolio procurement strategy models. E role of the spot trading liquidity and option speculation in buyer’s expected profit is analyzed, and the cost threshold and option pricing formula are obtained, which provide a decision basis for the buyer.
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