A Contingent-Claims Approach to the Inventory-Stocking Decision

14 Pages Posted: 13 Jan 2005

See all articles by John D. Stowe

John D. Stowe

Ohio University

Tie Su

University of Miami - Department of Finance

Abstract

The contingent-claims approach associates the demand for an inventory item with an underlying state variable. We map the payoffs from an inventory policy onto this variable, construct a portfolio of options that replicates these inventory payoffs, and then derive the value of an inventory policy using option-pricing models. This approach views inventory as an option on future sales. The paper reevaluates some of the basic inventory problems and shows how these problems can be solved with economically sound pricing models. The paper shows that the tools of financial economics can be used to make basic decisions in inventory management.

Suggested Citation

Stowe, John D. and Su, Tie, A Contingent-Claims Approach to the Inventory-Stocking Decision. Available at SSRN: https://ssrn.com/abstract=648229

John D. Stowe (Contact Author)

Ohio University ( email )

640 Copeland
Athens, OH 45701
United States
(434) 409-0239 (Phone)

Tie Su

University of Miami - Department of Finance ( email )

P.O. Box 248094
Coral Gables, FL 33124-6552
United States
305-284-1885 (Phone)
305-284-4800 (Fax)

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