8/3/2019 Credit Contract

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We consider a commodity procurement case where a pre-planned budget is assumed as a soft

constraint. The optimal multistage hedging strategy, which can be rebalanced quickly and

appropriately according to the updated market information, is going to be explored. What should

be mentioned especially is that the risk degree is higher when the procurement cost exceeds thepre-planned budget than when the procurement costs less than the budget. We will consider both

the case when the commodity demand is independent of the price and when the commodity

demand is dependent of the price, respectively. Although the transaction cost is usually

considered as negligible, it does affect the optimal strategy to some degree. Taking account of

the limited flexibility in the procurement budget for some companies, especially for the small-

and-medium enterprises under the global financial risk environment, the cash flow gap due to

small aspects of normal operating may cause the company to go bankruptcy. As the transaction

cost should be paid at the time of purchase, it will reduce the total return not only from the

perspective of the cost increase but also from the perspective of the available budget decrease.

Thus we think the added complexity is worth and we will study both models where the

transaction cost is incorporated or not. The transaction cost is composed of a fixed charge and a

variable cost. Moreover, as the above mentioned procurement framework is multistage, it is not

reasonable to assume the budget settled at the beginning period always remain the same fixed

amount as time goes on. Thus, we will further to extend the model to deal with the situation

where the available budget is changing.

As we all know, the material procurement cost is a large portion of the total cost for the small-and-

medium manufacturing enterprise. And the SME is easy to fall short of cash. My purpose is to

compare two cases. One is that the supplier provides some kind of financial service (e.g., in the form

of some kind of credit contract ) so that the small companies without enough cash in hand can get

the optimal quantity materials (otherwise, the company may only purchase a sub-optimal quantity

due to the limited budget ) first and the supplier can get back the money back with the realization of

the customer demand; the other case is that the buyer borrow money from the third party if they can,

such as bank, to pay for the procurement. How the financial service is designed will be studied. And

the supply chain efficiency will be compared.