Nine. Financial Valuation of Supply Chain Contracts

  1. Panos Kouvelis2,
  2. Lingxiu Dong2,
  3. Onur Boyabatli3 and
  4. Rong Li3
  1. Mustafa Ç Pinar,
  2. Alper şen and
  3. A. Gökay Erön

Published Online: 11 OCT 2011

DOI: 10.1002/9781118115800.ch9

The Handbook of Integrated Risk Management in Global Supply Chains

The Handbook of Integrated Risk Management in Global Supply Chains

How to Cite

Pinar, M. Ç., şen, A. and Erön, A. G. (2011) Financial Valuation of Supply Chain Contracts, in The Handbook of Integrated Risk Management in Global Supply Chains (eds P. Kouvelis, L. Dong, O. Boyabatli and R. Li), John Wiley & Sons, Inc., Hoboken, NJ, USA. doi: 10.1002/9781118115800.ch9

Editor Information

  1. 2

    Olin Business School, Washington University, St. Louis, Missouri, USA

  2. 3

    Lee Kong Chian School of Business, Singapore Management University, Singapore

Author Information

  1. Department of Industrial Engineering, Bilkent University, Bilkent, Ankara, Turkey

Publication History

  1. Published Online: 11 OCT 2011
  2. Published Print: 4 NOV 2011

ISBN Information

Print ISBN: 9780470535127

Online ISBN: 9781118115800

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Keywords:

  • arbitrage;
  • dual formulation;
  • financial markets;
  • martingales;
  • supply chain contracts

Summary

This chapter focuses on a single buyer-single supplier multiple period quantity flexibility contract in which the buyer has options to order additional quantities of goods in case of a higher than expected demand in addition to the committed purchases at the beginning of each period of the contract. It takes the buyer’s point of view and finds the maximum value of the contract for the buyer by analyzing the financial and real markets simultaneously. The chapter assumes both markets evolve as discrete scenario trees. Under the assumption that the demand of the item is perfectly positively correlated with the price of a risky security traded in the financial market, the chapter presents a model to find the buyer’s maximum acceptable price of the contract. Applying duality theory of linear programming, the chapter obtains a martingale expression for the value of the contract.

Controlled Vocabulary Terms

Contracts; Financial market; Supply chain