The Effects of Financial Risks on Inventory Policy
(2005) In Management Science 51(12). p.18041815 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 (businesscyclerelated) 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 riskfree 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 (businesscyclerelated) 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 riskfree 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:
http://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
 00251909
 DOI
 10.1287/mnsc.1050.0435
 language
 English
 LU publication?
 yes
 id
 266c94dfc0d84d17a5a66a529416762d (old id 638696)
 date added to LUP
 20080205 08:09:02
 date last changed
 20171022 04:55:23
@article{266c94dfc0d84d17a5a66a529416762d, 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 (businesscyclerelated) 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 riskfree 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 = {00251909}, keyword = {Inventory costing methods,Capital costs,Risk,Inventory control,Studies,Real options analysis,Stochastic models}, language = {eng}, number = {12}, pages = {18041815}, 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}, }