A real option approach to optimal inventory management of retail products

Ximin Huang; Na Song; Wai-Ki Ching; Tak-Kuen Siu; Ka-Fai Cedric Yiu

doi:10.3934/jimo.2012.8.379

Article Contents

2012, Volume 8, Issue 2: 379-389. Doi: 10.3934/jimo.2012.8.379

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A real option approach to optimal inventory management of retail products

1.
College of Management, Georgia Institute of Technology, 800 West Peachtree Street NW Atlanta, Georgia 30308-0520
2.
Advanced Modeling and Applied Computing Laboratory, Department of Mathematics, The University of Hong Kong, Pokfulam Road, Hong Kong
3.
Department of Applied Finance and Actuarial Studies and the Centre for Financial Risk, Faculty of Business and Economics, Macquarie University, Sydney, NSW 2109
4.
Department of Applied Mathematics, The Hong Kong Polytechnic University, Hung Hom, Kowloon, Hong Kong

Received: February 28, 2011

Revised: September 30, 2011

Published: March 2012

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Abstract

This paper introduces a novel approach to discuss an optimal inventory level of a retail product using a real option framework. We consider stochastic models for the evolution of the demand and unit price of the product over time. The profit structure of the retailer is represented by the payoff of the real option. An actuarial approach is then used to price the option. The retailer determines an optimal inventory level of the product with a view to maximizing the net expected profit. Numerical examples will be given to illustrate the practical implementation of the proposed approach and to investigate the impacts of changes in parameters on the optimal inventory level of the product.

Keywords:

Mathematics Subject Classification: Primary: 90B22; Secondary: 91A06.

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