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

• 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.

Subject headings

SAMHÄLLSVETENSKAP  -- Ekonomi och näringsliv (hsv//swe)

SOCIAL SCIENCES  -- Economics and Business (hsv//eng)

TEKNIK OCH TEKNOLOGIER  -- Samhällsbyggnadsteknik -- Transportteknik och logistik (hsv//swe)

ENGINEERING AND TECHNOLOGY  -- Civil Engineering -- Transport Systems and Logistics (hsv//eng)

Keyword

Inventory theory

Risk

Cost benefit analysis newsboy problem

Logistics

Logistik

cost benefit analysis newsboy problem

inventory theory

risk

Publication and Content Type

ref (subject category)

art (subject category)