Optimal Option Purchasing Decisions for the Risk-Averse Retailer with Shortage Cost

Xin Sheng Xu, Felix T.S. Chan

Research output: Journal article publicationJournal articleAcademic researchpeer-review

3 Citations (Scopus)

Abstract

To hedge against potential risks, this paper introduces the conditional value-at-risk (CVaR) measure into the option purchasing for the risk-averse retailer with shortage cost. We introduce two models for the risk-averse retailer to select the optimal option purchase quantity. It is found that both two optimal option purchase quantities to two models can be decreasing in the retail price and increasing in the option executing price under certain conditions. This is different from the optimal option purchase quantity for a risk-neutral retailer to maximize the expected profit. It is found that both two optimal option purchase quantities may be increasing or decreasing in the confidence level, which implies a retailer who becomes more risk-averse may purchase more or fewer options to hedge against potential risks. Under both two optimal option purchase quantities, it is proven that the retailer's expected profit is decreasing in the confidence level. This confirms the fact that high return implies high risk while low risk comes with low return.

Original languageEnglish
Article number1940005
JournalAsia-Pacific Journal of Operational Research
Volume36
Issue number2
DOIs
Publication statusPublished - 1 Apr 2019

Keywords

  • conditional value-at-risk
  • risk-averse
  • shortage cost
  • Supply chain option

ASJC Scopus subject areas

  • Management Science and Operations Research

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