Optimal financial and ordering decisions of a firm with insurance contract

AbstractThis paper examines the impact of a bank's risk limit on the financial and ordering decisions of a capital-constrained firm with insurance contract. All our major results can be computed via explicit expressions. It is shown that the bank will control its risk to be below the risk limit through setting a loan limit and the firm can make the loan limit increase by buying a deductible insurance policy. It is also shown that the repayment demand level needed to avoid bankruptcy will not be affected by the insurance policy. We derive the firm's optimal ordering quantity and insurance coverage level under a downside risk measurement and a variance risk measurement separately. It is shown that the firm should pay more attention to whether to buy insurance or not under the downside risk measurement and how much insurance coverage to buy under the variance risk measurement. Under the downside risk measurement, once the firm decides to buy insurance, the optimal coverage level is independent of the bank's ...

[1]  Credit Risk and the Deposit Insurance Premium, a Note , 2000 .

[2]  Joseph E. Stiglitz,et al.  Some Aspects of the Pure Theory of Corporate Finance: Bankruptcies and Take-Overs: Reply , 1972 .

[3]  Martin Shubik,et al.  Control of Dividends, Capital Subscriptions, and Physical Inventories , 2005, Manag. Sci..

[4]  Samuel H. Huang,et al.  Computer-assisted supply chain configuration based on supply chain operations reference (SCOR) model , 2005, Comput. Ind. Eng..

[5]  Peter Kischka,et al.  Newsvendor Problems with VaR and CVaR Consideration , 2012 .

[6]  Chih-Yang Tsai,et al.  On supply chain cash flow risks , 2008, Decis. Support Syst..

[7]  Stewart C. Myers,et al.  Interactions of Corporate Financing and Investment Decisions-Implications for Capital Budgeting , 1974 .

[8]  John R. Birge,et al.  Equity valuation, production, and financial planning: A stochastic programming approach , 2004 .

[9]  K. Sycara,et al.  Sharing inventory risk in supply chain: The implication of financial constraint , 2009 .

[10]  Richard C. Stapleton,et al.  Some Aspects of the Pure Theory of Corporate Finance: Bankruptcies and Take-Overs: Comment , 1975 .

[11]  Issouf Soumaré,et al.  Credit insurance and investment: A contingent claims analysis approach , 2010 .

[12]  S. Abraham Ravid,et al.  On the Interaction of Real and Financial Decisions of the Firm Under Uncertainty , 1985 .

[13]  B. Caillaud,et al.  Corporate insurance with optimal financial contracting , 2000 .

[14]  S. Myers.  Determinants of corporate borrowing , 1977 .

[15]  A holistic framework for short-term supply chain management integrating production and corporate financial planning , 2007 .

[16]  Matthew J. Sobel.  Capital Structure and Inventory Management , 2006 .

[17]  Shouyang Wang,et al.  Risk Management of Supply and Cash Flows in Supply Chains , 2011 .

[18]  Chang Hwan Lee,et al.  Coordination contracts in the presence of positive inventory financing costs , 2010 .

[19]  N. Raghavan,et al.  Short-term financing in a cash-constrained supply chain , 2011 .

[20]  Volodymyr Babich,et al.  Pre-IPO Operational and Financial Decisions , 2004, Manag. Sci..

[21]  Matthew J. Sobel,et al.  Echelon base-stock policies are financially sub-optimal , 2007, Oper. Res. Lett..

[22]  John A. Buzacott,et al.  Inventory Management with Asset-Based Financing , 2004, Manag. Sci..

[23]  Michael H. Aanderson,et al.  The interaction of investment and financing decisions under moral hazard , 1998 .

[24]  Panos Kouvelis,et al.  The Newsvendor Problem and Price‐Only Contract When Bankruptcy Costs Exist , 2011 .