The Spot Exchange of Real Options and Its Impact on the Supply Chain

Project: Research

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The researchers propose an unprecedented study of the spot exchange of real options and its impact on the supply chain management.Real options entail a right for buyers to purchase a product at a particular time, place, and price so to hedge possible risks in demand, price, and supply. Unlike the open-market financial options trading whose practices evolved from years of empirical optimization, the attention to the spot exchange of real options just began to emerge. The study was in part triggered by the difficulties faced by Alibaba, a world largest e-marketplace provider, in deciding whether to extend its e-platform to support the real options exchange, given the growing practice of self-initiated options exchange amongst its customers. Discussions on the similar intention have been reported from some leading companies such as HP, Sun Microsystems and Agilent. Many questions arise that are non-trivial and unanswered in the literature. For example,Would spot options exchange helps to reduce risks and increase profit for suppliers?Under what conditions allowing the ex post options exchange amongst the buyers would present a better alternative to a supplier over those existing flexible contract approaches such as flexible quantity or buy-back policies?Would it be worthwhile for a supplier, or a 3rd-party service provider to provide an e-platform for the spot options exchange?What are the conditions necessary to sustain the spot options market, and so its e-platform could continuously attract potential users and generate the critical mass?Would the existence of the spot options exchange encourages more options purchase ex ante or decreases the incentive for a maximal hedge?These and many other issues are of great importance to a manufacturing-based emerging economy, and particularly so to the capital-intensive industries, where the companies are plagued with highly uncertain demands, shrinking product life cycles, high risks of inventory obsolescence or significant profit losses from stock-outs and underutilized capacity, as well to those seasonal commodities manufacturers, where there are long lead times, short selling seasons and high demand uncertainties.The researchers propose to develop an analytical framework to capture and analyze characteristics of the spot options exchange market, to assess its effects, to guide the search of optimal strategies for each party, and to establish conditions under which its e-platform could be efficient and sustainable. For the market participants identified in this study, the researchers would provide business models for improved demand and supply coordination. The study could not only lead to improved industrial practice but also open research opportunities as fundamental as multi-objective optimization or as exciting as cross-disciplinary advance in e-commerce, supply chain management, and industrial management.


Project number9041511
Grant typeGRF
Effective start/end date1/09/0927/11/13