The Effects of Financial Risks on Inventory Policy
(2005) In Management Science 51(12). p.1804-1815- Abstract
- The effect of financial risks on (R, Q) inventory policies is analyzed in a real options framework. Simple adjustments of the usual formulas for R and Q are suggested and tested. Stochastic demand and purchase costs are considered, both with known systematic (business-cycle-related) risk. The systematic risk of stochastic demand has typically a negligible effect on the optimal values of R and Q, although an improvement may be achieved by a simple adjustment of R. The systematic risk of the purchase price, c, has a significant effect on R and Q. The capital holding cost should be estimated as r . c, where r is the sum of the risk-free interest rate, the expected price decrease, and the risk premium associated with the systematic risk of c.... (More)
- The effect of financial risks on (R, Q) inventory policies is analyzed in a real options framework. Simple adjustments of the usual formulas for R and Q are suggested and tested. Stochastic demand and purchase costs are considered, both with known systematic (business-cycle-related) risk. The systematic risk of stochastic demand has typically a negligible effect on the optimal values of R and Q, although an improvement may be achieved by a simple adjustment of R. The systematic risk of the purchase price, c, has a significant effect on R and Q. The capital holding cost should be estimated as r . c, where r is the sum of the risk-free interest rate, the expected price decrease, and the risk premium associated with the systematic risk of c. For goods quoted on commodity exchanges, r may be estimated directly from the prices on forward contracts. Its size (and sign) varies considerably for different commodities. (Less)
Please use this url to cite or link to this publication:
https://lup.lub.lu.se/record/638696
- author
- Berling, Peter LU and Rosling, Kaj LU
- organization
- publishing date
- 2005
- type
- Contribution to journal
- publication status
- published
- subject
- keywords
- Inventory costing methods, Capital costs, Risk, Inventory control, Studies, Real options analysis, Stochastic models
- in
- Management Science
- volume
- 51
- issue
- 12
- pages
- 1804 - 1815
- publisher
- Informs
- external identifiers
-
- wos:000234397600007
- scopus:29144439711
- ISSN
- 0025-1909
- DOI
- 10.1287/mnsc.1050.0435
- language
- English
- LU publication?
- yes
- id
- 266c94df-c0d8-4d17-a5a6-6a529416762d (old id 638696)
- date added to LUP
- 2016-04-04 08:50:54
- date last changed
- 2023-01-21 00:32:21
@article{266c94df-c0d8-4d17-a5a6-6a529416762d,
abstract = {{The effect of financial risks on (R, Q) inventory policies is analyzed in a real options framework. Simple adjustments of the usual formulas for R and Q are suggested and tested. Stochastic demand and purchase costs are considered, both with known systematic (business-cycle-related) risk. The systematic risk of stochastic demand has typically a negligible effect on the optimal values of R and Q, although an improvement may be achieved by a simple adjustment of R. The systematic risk of the purchase price, c, has a significant effect on R and Q. The capital holding cost should be estimated as r . c, where r is the sum of the risk-free interest rate, the expected price decrease, and the risk premium associated with the systematic risk of c. For goods quoted on commodity exchanges, r may be estimated directly from the prices on forward contracts. Its size (and sign) varies considerably for different commodities.}},
author = {{Berling, Peter and Rosling, Kaj}},
issn = {{0025-1909}},
keywords = {{Inventory costing methods; Capital costs; Risk; Inventory control; Studies; Real options analysis; Stochastic models}},
language = {{eng}},
number = {{12}},
pages = {{1804--1815}},
publisher = {{Informs}},
series = {{Management Science}},
title = {{The Effects of Financial Risks on Inventory Policy}},
url = {{http://dx.doi.org/10.1287/mnsc.1050.0435}},
doi = {{10.1287/mnsc.1050.0435}},
volume = {{51}},
year = {{2005}},
}