Use of inventory and option contracts to hedge financial risk in planning under uncertainty

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Abstract

The use of inventory and options in the management of financial risk in planning under uncertainty is analyzed. The intuitive notion that the addition of inventory can reduce risk is explored to reveal that it is only guaranteed if models managing risk are used and can otherwise lead to higher risk exposures. An example where risk is managed with options contracts is also presented, revealing that risk is also hedged only through an approach where risk is properly managed but not necessarily every time options are used. © 2004 American Institute of Chemical Engineers AIChE J, 50: 990–998, 2004

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