Flexible Buy-back Contract Model Design with Financial Options in a Supply Chain

Abstract

The purpose of this research is to show that option contract model played the decisive role in removing the risk. As one of the option types, we design a mathematical model for buy-back contract and provide the optimal solution to maximize the expected profit of buyers. We here deal with four cases by demand scenarios for formulation and derive the optimal solution. And we also examine the effectiveness of model by numerical example comparing with call option and put option models. In the numerical example, we found that availability of the buy-back option model has changed by demand sections. Moreover, we also verified that an initial order quantity of the buy-back is more than call option and less than put option when the expected profits of the call-put-buy-back option model are equal.