Value of a put option to the risk-averse newsvendor

In this paper we consider an extension of the single-period inventory model with stochastic demand where a put option can be purchased to reduce losses resulting from low demand. The newsvendor not only chooses the order quantity but also determines the “strike price” and/or the “strike quantity” of the put option. As the buyer of the put option, the newsvendor pays the option writer an amount that equals the expected option payoff plus a risk …