A black-scholes approach to satisfying the demand in a failure-prone manufacturing system

Jorge R. Chavez-Fuentes, Oscar R. González, W. Steven Gray

Research output: Chapter in Book/Report/Conference proceedingConference contributionpeer-review

Abstract

The goal of this paper is to use a financial model and a hedging strategy in a systems application. In particular, the classical Black-Scholes model, which was developed in 1973 to find the fair price of a financial contract, is adapted to satisfy an uncertain demand in a manufacturing system when one of two production machines is unreliable. This financial model together with a hedging strategy are used to develop a closed formula for the production strategies of each machine. The strategy guarantees that the uncertain demand will be met in probability at the final time of the production process. It is assumed that the production efficiency of the unreliable machine can be modeled as a continuous-time stochastic process. Two simple examples illustrate the result.

Original languageEnglish
Title of host publicationProceedings of the Thirty-Ninth Southeastern Symposium on System Theory, SSST
Pages154-158
Number of pages5
DOIs
StatePublished - 2007
Externally publishedYes
Event2007 39th Southeastern Symposium on System Theory, SSST - Macon, GA, United States
Duration: 4 Mar 20076 Mar 2007

Publication series

NameProceedings of the Annual Southeastern Symposium on System Theory

Conference

Conference2007 39th Southeastern Symposium on System Theory, SSST
Country/TerritoryUnited States
CityMacon, GA
Period4/03/076/03/07

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