Optimal Ordering Policy for Supply Option Contract with Spot Market

Abstract

This paper considers the procurement mechanism with two supply channels, namely, an option contract purchase and a spot market. For the mechanism, under the stochastic demand and the stochastic spot price, we consider the portfolio procurement with the spot trading liquidity and the option speculation respectively. To maximize the buyer’s profit, we establish two optimal portfolio procurement strategy models for those two scenarios. Based on the buyer’s cost-benefit analysis, we present a solution method to each model and provide an optimal ordering policy to the buyer. By the obtained results, we analyze the role of the spot trading liquidity and option speculation in a buyer’s expected profit. Some numerical experiments are presented to show the validity of the formulated models.