The Application Of Option In Supply Chain Risk Management

Supply chain is two or more parties linked by a flow of goods, information, and funds. Supply Chain Management is to manage the flow of materials, information and funds across the entire supply chain, from supplier to component producers to final assemblers to distribution, and ultimately to the consumers. As there are lots of uncertain factors in the practical world, it is very significative to research the supply chain risk management.The uncertainty of the price and demand of the commodity are the biggest problems of the supply chain management, as the same as the uncertainty of the price in the finance market. In the financial field, people have created many tools to evade the risk, such as futures, options and so on. Use such tools especially the options to manage the supply chain have a good sense.The application of the financial tools like option in the supply chain management can bring many advantages to both of the supplier and the buyer. First it can provide flexibility to the buyer to respond to market changes. Second it can let a supplier make more flexible production schedule. Third it can coordinate the channel of the supply chain. And at last it can bring extra profits to both sides.The application of the option contracts in supply chain has a big problem that is how to price the option contract. There are two main solve methods in the foregoing research. The first one is to use a numerical value, and the other is to build a optimized model to gain a superior value. The above two methods both have a big problem that they neglect the inherent value of the option. Another problem in the supply chain management is how to deal with the leftover goods. One method is to solve it by buyer and the other is to return to the supplier under a discount price. The latter method is used more comment. However it also has a problem in that method that is how to set the discount price. In fact the return policy is a put option given to the buyer by supplier. It contains great value.Base on the frontal two problems we build a model that contains single buyer and single supplier, the two sides sign a compound option contract and a future contract to cooperate. We use the Risk-neutral Pricing Theory and the Non-arbitrage Pricing Principle to price the contract. We build a dynamic stochastic programming to prove the validity of the model and the rationality of the contract's price. We analyze a simulant case and we find that the option contract can bring flexibility and profits to both buyer and supplier. It also can coordinate the supply chain channel.