Market Pricing Orders Management with Price and Demand Uncertainty in Complete and Implied Complete Markets
Charles S. Tapiero
NYU Poly - Department of Finance and Risk Engineering
July 13, 2008
International Journal of Production Economics, Vol. 115, No. 1, 2008
The purpose of this paper is to price an order (inventory control) policy when markets are complete, assuming that the underlying product ordered (a commodity for example) by an industrial manager for example, can be set to be independent of inventories by using price derivatives (such as Call and Put options on the underlying product) while mitigating the effects of demand uncertainty. The approach developed in this paper underlies as well a common practice by certain firms who use materials that are traded in speculative financial markets. In these situations, managers combine their production based activities with speculations regarding their potential demand and the associated price of materials. To illustrate the approach used in this paper, a number of examples are used. For simplicity, and in order to highlight the essential elements of the approach used, we consider a two periods, two states (of uncertainty) model which is generalized subsequently to multiple states including price and demand uncertainty.
Number of Pages in PDF File: 14
Keywords: market pricing, orders management, inventory, financeAccepted Paper Series
Date posted: July 17, 2009
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