A multi-period risk sharing supply chain contract under consideration of price and demand uncertainties

Abstract

Exchange rate is extremely volatile and displays a Markovian regime switching property. This report proposes a multi-period procurement problem with a flexible quantity risk-sharing supply contract that may provide a prevention against exchange rate (FX) fluctuations for international traders. The buyer assumed to be encountered with a random price modelled by a regime-switching geometric Brownian motion and also random demand. The proposed risk sharing supply contract model helps to compensate supplier for the depreciating market price and also helps buyer when purchase price increases. According to the author’s knowledge, none of the studies in the literature considers a risk-sharing supply contract with random demand and random price while modelling the exchange rates by regime switching approach. Multi-period lattice model is developed for valuation of risk-sharing supply contract. The problem is solved with using dynamic programming approach. A numerical example and sensitivity analyses are presented to illustrate the proposed model.