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

Berling, Peter LU (2008) In Omega: the International Journal of Management Science 36(6). p.1086-1095
Abstract
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.
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author
organization
publishing date
type
Contribution to journal
publication status
published
subject
keywords
cost benefit analysis newsboy problem, inventory theory, risk
in
Omega: the International Journal of Management Science
volume
36
issue
6
pages
1086 - 1095
publisher
Elsevier
external identifiers
  • wos:000255311800015
  • scopus:40649111645
ISSN
0305-0483
DOI
10.1016/j.omega.2006.05.007
language
English
LU publication?
yes
id
20e961b9-f8de-4fad-8ba0-3f66ec0e2233 (old id 1205105)
date added to LUP
2008-09-18 13:43:08
date last changed
2017-07-02 03:41:56
@article{20e961b9-f8de-4fad-8ba0-3f66ec0e2233,
  abstract     = {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.},
  author       = {Berling, Peter},
  issn         = {0305-0483},
  keyword      = {cost benefit analysis newsboy problem,inventory theory,risk},
  language     = {eng},
  number       = {6},
  pages        = {1086--1095},
  publisher    = {Elsevier},
  series       = {Omega: the International Journal of Management Science},
  title        = {Real options valuation principle in the multi-period base-stock problem},
  url          = {http://dx.doi.org/10.1016/j.omega.2006.05.007},
  volume       = {36},
  year         = {2008},
}