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Pricing bundled options in supply chain contracts

Haksöz, Çağrı and Şimşek, Koray Deniz (2010) Pricing bundled options in supply chain contracts. [Working Paper / Technical Report] Sabanci University ID:SU_FMAN_2010/0002

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Abstract

In this paper, for a supply chain contract, we design and value a bundled option that is composed of contract abandonment and price renegotiation. We numerically show that the bundled option is more valuable for the contract than either of the options, i.e., contract abandonment and price renegotiation, in isolation. This value increases monotonically as the spot price becomes more volatile. The value of the bundled option is less than the sum of the individual option values, hence showing the sub-additive property. We demonstrate that in the presence of high spot price volatility, the bundled option is more valuable when renegotiation date is selected to be closer to the half-life of the contract. We also show that early contract abandonment probability goes down in the presence of renegotiation option. We conclude that the commodity supplier should negotiate a supply chain contract with flexible options at the design stage with the buyer, obtaining contract abandonment and price renegotiation options –as a bundled option—in order to enhance the supply contract value and reduce the contract breach risk.

Item Type:Working Paper / Technical Report
Uncontrolled Keywords:Supply chain contracts, Procurement, Contract breach risk, Abandonment and renegotiation options, Basel II -Clients, Products, Business Practices Category Risks-
Subjects:H Social Sciences > HD Industries. Land use. Labor > HD0061 Risk Management
T Technology > T Technology (General) > T055.4-60.8 Industrial engineering. Management engineering > T57.6-57.97 Operations research. Systems analysis
T Technology > TS Manufactures > TS0155-194 Production management. Operations management
H Social Sciences > HG Finance > HG176.6 Financial engineering
ID Code:14196
Deposited By:Çağrı Haksöz
Deposited On:10 Aug 2010 12:03
Last Modified:10 Aug 2010 12:03

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