Real options approach for fashionable and perishable products using stock loan with regime switching

Chun Hung Chiu, Shui Hung Hou, Xun Li, Wei Liu

Research output: Journal article publicationJournal articleAcademic researchpeer-review

5 Citations (Scopus)

Abstract

We use the real options approach to study the discount price and the optimal call-back time of a recallable air ticket, and the optimal launch time for a fashion product. Two types of uncertainty are considered, the demand uncertainty and the uncertainty of the switch time of the market condition. We propose that the problems can be formulated as a financial stock loan with regime switching and finite maturity. We formulate the stock loan as an American call options with a time-varying strike price. First, we derive the approximate valuation of the stock loan. Then, we formulate the recallable air ticket problem and the launch time of fashion product problem as two different stock loans. The analyses show that a higher (exogenous) regime-switching rate leads to a higher value for the call option, while a lower (exogenous or endogenous) increment rate on the exercise price allows the company to wait longer before exercising the option and thereby obtain a bigger profit. Thus, by obtaining more accurate information, or having better control of these parameters, could help companies to improve their risk management.
Original languageEnglish
Pages (from-to)357-377
Number of pages21
JournalAnnals of Operations Research
Volume257
Issue number1-2
DOIs
Publication statusPublished - 1 Oct 2017

Keywords

  • Real options
  • Regime switching
  • Revenue management
  • Risk management
  • Stock loan
  • Variational inequality

ASJC Scopus subject areas

  • Decision Sciences(all)
  • Management Science and Operations Research

Cite this