A real option approach to optimal inventory management of retail products

This paper introduces a novel approach to discuss an optimal inventory level of a retail product using a real option framework. We consider stochastic models for the evolution of the demand and unit price of the prod- uct over time. The profit structure of the retailer is represented by the payoff of the real option. An actuarial approach is then used to price the option. The retailer determines an optimal inventory level of the product with a view to maximizing the net expected profit. Numerical examples will be given to illustrate the practical implementation of the proposed approach and to investigate the impacts of changes in parameters on the optimal inventory level of the product.