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Discrete Dynamics in Nature and Society
Volume 2014, Article ID 906739, 7 pages
http://dx.doi.org/10.1155/2014/906739
Research Article

Options Procurement Policy for Option Contracts with Supply and Spot Market Uncertainty

1School of Economics and Management, Southeast University, Nanjing 210096, China
2School of Business, Nanjing University, Nanjing 210093, China
3Department of Management Science, Shenzhen University, Shenzhen 518060, China

Received 11 April 2014; Accepted 11 June 2014; Published 1 July 2014

Academic Editor: Xiang Li

Copyright © 2014 Weili Xue et al. This is an open access article distributed under the Creative Commons Attribution License, which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.

Abstract

Supplier’s reliability is a major issue in procurement management. In this paper, we establish a decision making model from the perspective of the firm who will procure from the multiple suppliers and the spot markets. The suppliers are unreliable and provide different types of option-type supply contracts which should be made before demand realization, while the spot market can only be used after demand realization and has both the price and liquidity risks. We establish the optimal portfolio policies for the firm with conditions to find the qualified suppliers. By defining a new function which contains the demand risk, the supplier’s risk, and the liquidity risk, we find that the optimal policy is to allocate different curves of this function to different suppliers. We also study some special cases to derive some managerial insights. At last, we numerically study how the various risks affect the choice of suppliers and the value of the option contract.