Abstract
In this article, we apply a real option approach for improving revenue management regarding fluctuating commodity prices and time-varying strike prices in the field of operational research. We also take into account the cyclical nature of commodity prices, which is an important “stylized” fact in the empirical behavior of commodity prices. Two typical examples are provided to illustrate how real options can be used for enhancing profits and managing risk, which are important in revenue management. Valuation of these real options via a semi-analytical algorithm is also discussed.
This is a preview of subscription content, log in via an institution to check access.
Access this chapter
Tax calculation will be finalised at checkout
Purchases are for personal use only
Notes
- 1.
For technically inclined readers, the “max” should, in general, be replaced by “ess-sup,” where “ess-sup” means the essential supremum and is defined as the smallest essential upper bound. That is, for any real-valued function f defined on a measure space (X, Σ, μ), ess-sup x ∈ X f(x) : = inf{l ∈ ℜ | μ(x ∈ X | f(x) > l) = 0}. The notion of “ess-sup” is relevant in probability theory, or in general, measure theory, where one usually considers statements that are not valid everywhere, but only valid almost everywhere. Intuitively, since both sides of the above (9) are random variables, we only require the optimal result holds true almost surely with respect to the probability measure \(\mathcal{P}\) instead of for all sample points ω ∈ Ω.
References
Allaz B, Vila JL (1993) Cournot competition, forward markets and efficiency. J Econ Theor 59:1–16
Anderson CK, Davison M, Rasmussen H (2004) Revenue management: a real options approach. Nav Res Logist 51:686–703
Barone-Adesi G, Whaley R (1987) Efficient analytic approximation of American option values. J Finance 42:1–20
Belobaba P (1987) Airline yield management: an overview of seat inventory control. Transport Sci 21:63–73
Deng SJ, Feng Y, Li X (2006) A real options analysis for optimal dynamic pricing of perishable products tradable in spot markets. The Chinese University of Hong Kong, Hong Kong (Preprint)
Duffie D, Richardson HR (1991) Mean-variance hedging in continuous time. Ann Appl Probab 1:1–15
Elliott RJ, Sick GA, Stein M (2003) Modeling electricity price risk. Working paper, University of Calgary and University of Oregon
Feng Y, Gallego G (2005) Optimal booking control with a callable booking class. Working paper, Chinese University of Hong Kong and Columbia University in the City of New York
Gallego G, Kou SG, Phillips R (2004) Revenue management of callable products. Working paper, Columbia University
Gallego G, Van Ryzin G (1994) Optimal dynamic pricing of inventories with stochastic demand over finite horizons. Manag Sci 40:999–1020
Geraghty MK, Johnson E (1997) Revenue management saves national car rental. Interfaces 27:107–127
Li X, Siu TK, Wu Z (2008) Risk hedging for strategic petroleum reserve. Math Model Appl Comput
Shreve S (2004) Stochastic calculus for finance. Springer, New York
Weatherford L, Bodily S (1992) A taxonomy and research overview of perishable-asset revenue management: yield management, overbooking, and pricing. Oper Res 40:831–844
Wilmott P, Howison S, Dewynne J (1996) The mathematics of financial derivatives. Cambridge University Press, USA
Wu DJ, Kleindorfer PR (2005) Competitive options, supply contracting, and electronic markets. Manag Sci 51:452–466
Wu DJ, Kleindorfer PR, Sun Y, Zhang JE (2002) The price of a real option on capacity. Working paper, Drexel University, University of Pennsylvania, and Hong Kong University of Science and Technology
Xia J, Zhou X (2007) ”Stock loans” (pdf), Mathematical Finance, 17:307–317
Acknowledgements
Research supported in part by HKU CRCG Grants and Strategic Research Theme Fund on Computational Physics and Numerical Methods. The second author acknowledges financial support from PolyU grants A-SA28 and G-YH20. The third author acknowledges the Discovery Grant from the Australian Research Council (ARC), (Project No.: DP1096243). The fourth author acknowledges the financial support of the University of Saskatchewan Research Grant #407294.
Author information
Authors and Affiliations
Corresponding author
Editor information
Editors and Affiliations
Rights and permissions
Copyright information
© 2010 Springer-Verlag Berlin Heidelberg
About this chapter
Cite this chapter
Ching, WK., Li, X., Siu, T.K., Wu, Z. (2010). Improving Revenue Management: A Real Option Approach. In: Cheng, T., Choi, TM. (eds) Innovative Quick Response Programs in Logistics and Supply Chain Management. International Handbooks on Information Systems. Springer, Berlin, Heidelberg. https://doi.org/10.1007/978-3-642-04313-0_6
Download citation
DOI: https://doi.org/10.1007/978-3-642-04313-0_6
Published:
Publisher Name: Springer, Berlin, Heidelberg
Print ISBN: 978-3-642-04312-3
Online ISBN: 978-3-642-04313-0
eBook Packages: Business and EconomicsBusiness and Management (R0)