Pricing Research On Compound Options Of Contract In Supply Chain

With the great demand uncertainty, retailer’s ordering strategy andsupplier’s supplying strategy are facing great risks in supply chain; so it is aproblem to design a risk-sharing strategy for both of them. As the supplychain system is also facing commodity price and demand uncertainty, it isfeasible to introduce financial products to the supply chain management.Option has a high flexibility, which is favored by scholars, and it becomes anew form to achieve supply chain coordination and revenue sharing.This paper establishes a compound option model with a resale provisionand American option provision, which gives the holder prior to buy goods atan agreed price before the maturity of the American option, furthermore toreturn the remaining product in the end of the sales season. This paper pricesthe option contract through the no-arbitrage pricing theory and therisk-neutral theory, and summarizes the influence of parameters on optionvalue. Numerical results show that: First, resale provision can increase the retailer’s order quantity, and reduce the retail price, thus ease the supplychain "double marginalization" effect and increase the supplier’s sales;Secondly, the provision of American option increases the value of contract,provides retailer with greater flexibility and efficiency in face of uncertaindemand; Finally, the article summarizes the influence of expiration time, theexercise price, resale price, volatility and risk-free interest rates on the valueof compound option.The main contributions are:(1) The article introduces option mechanisminto supply chain risk management, which forms the risk dispersion andprofit redistribution mechanism.(2) Application of finite element method toprice the American option with complex provisions demonstrates its stabilityand effectiveness.(3) We sums up the influence of factors on option value.