The value of bidirectional option contracts on the multi-period ordering under inflation

Abstract

This paper considers the rising market price and the time varying demand caused by the inflation. To manage these above risks, the retailer has an opportunity to place two different types of orders, viz., the firm order and the bidirectional options order, from the supplier in each period. This paper formulates a periodic-review inventory model for the retailer with bidirectional option contracts under inflation. Based on stochastic dynamic programming, this paper studies the structure of the optimal ordering policy in each period. Then this paper provides an approximation to evaluate the corresponding policy parameters. By taking the case without bidirectional option contracts as a benchmark, this paper demonstrates that the utilization of bidirectional option contracts might prompt the retailer to enhance the service level and improve the performance.