Risk Management in Exploiting Spot Market in Spite of Purchase Discount

Establishing spot markets, mediator firms make advance contract with suppliers to provide commodity for a specific time and decreasing the risk. Then, they use spot market when facing shortage or surplus commodity. In contrast with advanc contracts, spot market prepares little delivery time, but it imposes uncertainty in price to the buyer. In this paper, such exchanges are considered in the case of discount to determine the optimum number of purchase and to decrease the risk of retailer. The developed mathematical model is based on profit function of the buyer, and risk avesion of the buyer is considered as profit variance. To evaluate the discount, a function that predicts the discounts continuously has been used and the analysis of parameter sensitivities has been discussed with a numerical example. The results indicate that increasing the risk aversion of retailer, optimum amount of purchasing leads to the average demand; this amount is also significantly different according to the relation between the price of the contract and spot market.