The valuation of financial options, as is well known, is based on the recognition that an option's payouts can be replicated by a trading program that "manufactures" an equivalent payout distribution from an initial infusion of cash equal to the value of the option. One may in fact develop a quite satisfactory and practical theory of options pricing based on an optimization formulation of this replication model as a multiperiod stochastic production-inventory problem. This talk will explore how this optimization-based valuation approach may be extended to
the valuation and management of risky supply chain contracts.
