Option Pricing Methods for Estimating Capacity Shortages

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Date
2001-01-01
Authors
Pak, Dohyun
Ryan, Sarah
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Ryan, Sarah
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Abstract

Uncertain demand combined with a positive lead time for adding capacity creates the risk of capacity shortage during the lead time. Accurate shortage estimation is very important to determine a capacity expansion policy. In this paper, we investigate four kinds of option pricing methods to estimate the shortage during a fixed lead time under the assumption of an exponential trend for demand growth. We compare the effect of the different shortage measures on the optimal parameters for an expansion policy over the long term.

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This is a proceeding published as Pak, D. and S. M. Ryan (2001). “Option Pricing Methods for Estimating Capacity Shortages,” Proceedings of the 2001 Industrial Engineering Research Conference, Dallas, May 2001. Posted with permission.

Keywords
Capacity shortage, Option pricing, Optimal expansion policy
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