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Options procurement and pricing optimization of supply chain in the presence of spot market

This paper analyzes the optimal decisions in a risk-averse supplier-retailer supply chain in the presence of spot market. By introducing option contract, the paper establishes the mean-variance utility model for the retailer and the supplier respectively. Finally, the paper analyzes the optimal procurement financial allocation strategy (e.g. option, firm order, or spot market purchases quantities) for the retailer and the optimal production quantity and pricing strategies for the supplier.