Market Pricing Orders Management with Price and Demand Uncertainty in Complete and Implied Complete Markets

International Journal of Production Economics, Vol. 115, No. 1, 2008

14 Pages Posted: 17 Jul 2009

See all articles by Charles S. Tapiero

Charles S. Tapiero

NYU Polytechnic School of Engineering - Department of Finance and Risk Engineering

Date Written: July 13, 2008

Abstract

The purpose of this paper is to price an order (inventory control) policy when markets are complete, assuming that the underlying product ordered (a commodity for example) by an industrial manager for example, can be set to be independent of inventories by using price derivatives (such as Call and Put options on the underlying product) while mitigating the effects of demand uncertainty. The approach developed in this paper underlies as well a common practice by certain firms who use materials that are traded in speculative financial markets. In these situations, managers combine their production based activities with speculations regarding their potential demand and the associated price of materials. To illustrate the approach used in this paper, a number of examples are used. For simplicity, and in order to highlight the essential elements of the approach used, we consider a two periods, two states (of uncertainty) model which is generalized subsequently to multiple states including price and demand uncertainty.

Keywords: market pricing, orders management, inventory, finance

Suggested Citation

Tapiero, Charles S., Market Pricing Orders Management with Price and Demand Uncertainty in Complete and Implied Complete Markets (July 13, 2008). International Journal of Production Economics, Vol. 115, No. 1, 2008, Available at SSRN: https://ssrn.com/abstract=1433487

Charles S. Tapiero (Contact Author)

NYU Polytechnic School of Engineering - Department of Finance and Risk Engineering ( email )

Brooklyn, NY 11201
United States

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