Value of information through options contract under disruption risk

Date

2017-01-01

Author

Kole, Huseyin
Bakal, İsmail Serdar

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This work is licensed under a Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International License.

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In this study, we consider the replenishment strategy of a buyer with two suppliers. Since its regular supplier is prone to disruptions, the buyer utilizes an options contract with a more expensive but perfectly reliable supply option. We introduce three models depending on the level of information available when the options from the reliable supplier are exercised: (i) Full information (both supply and demand information), (ii) partial information (only supply information), and (iii) no information. We derive the optimal replenishment strategy of the buyer in each of these models and characterize the conditions under which the reliable supplier is utilized. Through both analytical and numerical studies, we investigate the effectiveness of an options contract under different levels of information.

Subject Keywords

Value of information, Options contract, Dual sourcing, Supply disruption

URI

https://hdl.handle.net/11511/42915

Journal

COMPUTERS & INDUSTRIAL ENGINEERING

DOI

https://doi.org/10.1016/j.cie.2016.11.006

Collections

Department of Industrial Engineering, Article

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Citation Formats

H. Kole and İ. S. Bakal, “Value of information through options contract under disruption risk,” COMPUTERS & INDUSTRIAL ENGINEERING, pp. 85–97, 2017, Accessed: 00, 2020. [Online]. Available: https://hdl.handle.net/11511/42915.