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The Effects of Financial Risks on Inventory Policy

Berling, Peter LU and Rosling, Kaj LU (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)
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author
organization
publishing date
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
2008-02-05 08:09:02
date last changed
2017-10-22 04:55:23
@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},
  keyword      = {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},
  volume       = {51},
  year         = {2005},
}