Portfolio procurement with an option contract and spot market

This paper considers a buyer's optimal procurement decision in a portfolio procurement with an option contract and a spot replenishment. For such a portfolio procurement, a buyer's optimal procurement decision is derived to maximize the expected profit. The properties of the optimal procurement decision are well discussed and the main contribution of the paper is twofold. First, the study verifies a buyer's no-option-reserving decision in a portfolio procurement and presents the reasons for such a decision. A buyer has no need to reserve options in an option contract and only needs to reserve commodities in the spot market to meet the whole market demand under certain conditions (e.g. the option reservation price is relatively large and the replenishment capacity in the spot market is sufficiently big). Second, the study shows that the replenishment capacity in the spot market has an important influence on a buyer's optimal option reserving quantity in an option contract, which suggests important insights for a buyer's optimal option reserving decision in a portfolio procurement. A buyer's optimal option reserving quantity has no relations with the retail price when there is an unlimited spot capacity, and this result has not been found in the previous literature. Based on the results, managerial insights are suggested for buyers to devise optimal procurement policies in a portfolio procurement.