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The Effects of Financial Risks on Inventory Policy

Author

Listed:
  • Peter Berling

    (Department of Industrial Management and Logistics, Lund University, P.O. Box 118, SE-221 00 Lund, Sweden)

  • Kaj Rosling

    (School of Technology and Design, Växjö University, SE-351 95 Växjö, Sweden)

Abstract

The effect of financial risks on (R, Q) inventory policies is analyzed in a real options framework. Simple adjustments of the usual formulas for R and Q are suggested and tested. Stochastic demand and purchase costs are considered, both with known systematic (business-cycle-related) risk. The systematic risk of stochastic demand has typically a negligible effect on the optimal values of R and Q, although an improvement may be achieved by a simple adjustment of R. The systematic risk of the purchase price, c, has a significant effect on R and Q. The capital holding cost should be estimated as r \cdot c, where r is the sum of the risk-free interest rate, the expected price decrease, and the risk premium associated with the systematic risk of c. For goods quoted on commodity exchanges, r may be estimated directly from the prices on forward contracts. Its size (and sign) varies considerably for different commodities.

Suggested Citation

  • Peter Berling & Kaj Rosling, 2005. "The Effects of Financial Risks on Inventory Policy," Management Science, INFORMS, vol. 51(12), pages 1804-1815, December.
    • Handle: RePEc:inm:ormnsc:v:51:y:2005:i:12:p:1804-1815
    DOI: 10.1287/mnsc.1050.0435
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    References listed on IDEAS

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