Article ID: | iaor2008628 |
Country: | United States |
Volume: | 51 |
Issue: | 12 |
Start Page Number: | 1804 |
End Page Number: | 1815 |
Publication Date: | Dec 2005 |
Journal: | Management Science |
Authors: | Rosling Kaj, Berling Peter |
Keywords: | risk |
The effect of financial risks on (R, Q) inventory policies is analyzed in a real options framework. Simple adjustments of the usual formulas for R and Q are suggested and tested. Stochastic demand and purchase costs are considered, both with known systematic (business-cycle-related) risk. The systematic risk of stochastic demand has typically a negligible effect on the optimal values of R and Q, although an improvement may be achieved by a simple adjustment of R. The systematic risk of the purchase price, c, has a significant effect on R and Q. The capital holding cost should be estimated as r · c, where r is the sum of the risk-free interest rate, the expected price decrease, and the risk premium associated with the systematic risk of c. For goods quoted on commodity exchanges, r may be estimated directly from the prices on forward contracts. Its size (and sign) varies considerably for different commodities.