• Modeling and Assessing the Quantity Flexibility Contracts for Seasonal Products with High Demand Volatility

Abstract

Quantity flexibility contracts can closely adapt to the market demand for established products and thus are an effective instrument for hedging against highly uncertain demand. However, a crucial issue is how, on the basis of risk sharing, sellers are adequately compensated for bearing the risk of demand uncertainty transferred from buyers when giving buyers option on order quantity. Accordingly, this study aims to properly model and assess the quantity flexibility contracts. To this end, this study first models demand forecast for the given product and then evaluates the expected gain acquired by the buyer from quantity flexibility contract. Subsequently, the assessing model is developed using real options approach. Finally, a numerical example analyses are performed to verify the reasonability and practicability of the proposed assessing model.

Keywords: Quantity Flexibility Contract, Quantity Flexibility, Real Options Approach