TY - GEN

T1 - A black-scholes approach to satisfying the demand in a failure-prone manufacturing system

AU - Chavez-Fuentes, Jorge R.

AU - González, Oscar R.

AU - Steven Gray, W.

PY - 2007

Y1 - 2007

N2 - 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.

AB - 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.

UR - http://www.scopus.com/inward/record.url?scp=34548139806&partnerID=8YFLogxK

U2 - 10.1109/SSST.2007.352338

DO - 10.1109/SSST.2007.352338

M3 - Conference contribution

AN - SCOPUS:34548139806

SN - 1424411262

SN - 9781424411269

T3 - Proceedings of the Annual Southeastern Symposium on System Theory

SP - 154

EP - 158

BT - Proceedings of the Thirty-Ninth Southeastern Symposium on System Theory, SSST

T2 - 2007 39th Southeastern Symposium on System Theory, SSST

Y2 - 4 March 2007 through 6 March 2007

ER -