Flexible and risk-sharing supply contracts under price uncertainty

This study examines supply contracts for deterministic demand but in an environment of uncertain prices. Valuation methodologies are developed for different types of supply contracts. Optimal purchasing strategies for both time-flexible and time-inflexible contracts with risk-sharing features are discussed. The discussion illustrates how time flexibility, quantity flexibility, supplier selection, and risk sharing, when carefully exercised can effectively reduce the sourcing cost in environments of price uncertainty.