Title: Determine targets with revenue maximisation and downside risk hedging considerations under the stochastic setting

Authors: Xiangling Hu; Jaideep G. Motwani

Addresses: Seidman College of Business, Grand Valley State University, 376C DeVos Center, 401 W. Fulton, Grand Rapids, MI 49504, USA ' Seidman College of Business, Grand Valley State University, 409C DeVos Center, 401 W. Fulton, Grand Rapids, MI 49504, USA

Abstract: This paper studies how to set revenue targets by finding the best trade-off between the expected return for achieving a target and the expected cost for missing a target when the revenue performance is stochastic. The corresponding formulas of calculating the target under the consideration of revenue maximisation, risk control, and revenue maximisation under controlled risk are developed and different scenarios under certain return and failure cost functions are discussed. This paper further discusses how to set sub-period targets under the consideration of expected revenue thereby, achieving the target at the period-end and thus controlling the downside risk. Numerical analysis about how the parameters impacting the downside risk and sub period target is also provided.

Keywords: stochastic processes; target setting; revenue management; downside risk; target revenue optimisation; risk hedging; risk control.

DOI: 10.1504/IJOR.2013.057487

International Journal of Operational Research, 2013 Vol.18 No.4, pp.467 - 483

Published online: 29 Jul 2014 *

Full-text access for editors Full-text access for subscribers Purchase this article Comment on this article