A real option approach to optimal inventory management of retail products

This paper introduces a novel approach to discuss an optimal inventory levelof a retail product using a real option framework.We consider stochastic models for the evolutionof the demand and unit price of the product over time. The profit structure of the retaileris represented by the payoff of the real option.An actuarial approach is then used toprice the option. The retailer determines an optimal inventory level of theproduct with a view to maximizing the net expected profit.Numerical examples will begiven to illustrate the practical implementation of the proposed approach andto investigate the impacts of changes in parameters on the optimal inventorylevel of the product.