Option contract application in emergency supply chains
by Masoud Rabbani; Hamed Vafa Arani; Hamed Rafiei
International Journal of Services and Operations Management (IJSOM), Vol. 20, No. 4, 2015

Abstract: Emergencies, such as natural and man-made disasters, might impose great amount of uncertainties on companies in supply chains, especially supply chain of relief materials. Risk hedging procedures such as risk-sharing contracts help the firms to survive from these uncertainties. In this study, an option contract application in relief material supply chains is considered within which a buyer purchase some options from a supplier and has a right, not obligation, to exercise it according to special conditions. In emergencies, condition for option exercising is disaster occurrence which is probabilistic. Our study takes disaster intensity into account via a disaster intensity probability density function, upon which the buyer can exercise a portion of the option contract. In order to motivate both parties to participate in the option contract, an option pricing model based on binomial trees is presented, which optimises option and exercise prices in four different conditions. Also, it is assumed that both parties of the supply chain can negotiate on the obtained prices. In order to validate the model, a numerical example is presented, whose obtained results demonstrate a feasible region for option and exercise price.

Online publication date: Wed, 22-Apr-2015

The full text of this article is only available to individual subscribers or to users at subscribing institutions.

 
Existing subscribers:
Go to Inderscience Online Journals to access the Full Text of this article.

Pay per view:
If you are not a subscriber and you just want to read the full contents of this article, buy online access here.

Complimentary Subscribers, Editors or Members of the Editorial Board of the International Journal of Services and Operations Management (IJSOM):
Login with your Inderscience username and password:

Username:        Password:          Forgotten your password?

Want to subscribe?
A subscription gives you complete access to all articles in the current issue, as well as to all articles in the previous three years (where applicable). See our Orders page to subscribe.

If you still need assistance, please email subs@inderscience.com