Futures and Option Contracts of the Supply Chain Influenced by e-Business Market

Abstract

We consider a supply chain consisting of a retailer and a supplier, which is influenced by e-business market. To control the uncertainty in demand, the retailer can purchase futures or options from the supplier. Futures or options can be exercised by the retailer to replenish inventory in the season. Moreover, redundant futures or options might be traded in the e-business market. The retailer's equilibrium ordering decision and the supplier's equilibrium pricing decision are analyzed under each kind of contracts. In addition, a comparison of futures and options is also presented and the conditions under which futures (or options) are superior are also identified. Our research shows that both the supplier and the retailer can be better off comparing with the newsvendor cases by using the two contracts. Furthermore, due to superior flexibility of the options, channel coordination can be achieved by using options. However, more cost needs to be paid to replenish by options, which may hurt the retailer. Hence, if the cost of replenishing by options is not overly high, the options are recommended to use; otherwise, the futures are recommended to choose.