Option and forward contracting with asymmetric information: Valuation issues in supply chains

We investigate the role of forward commitments and option contracts between a seller (supplier) and a buyer (retailer) in the presence of asymmetric information. In our case, both parties face price and demand uncertainty, but the retailer, being closer to the market, has additional information about the true demand. The supplier, aware of this asymmetry, and acting as a Stackelberg leader, designs contracting arrangements that best meet his interest. We contrast the role of forward and option contracts in this environment and identify cases where combinations of the two are dominant. We examine how individual agents’ profits are affected by the contracting arrangements and by the degree of asymmetric information. Finally, we investigate how alternative contracting arrangements alters the expected value of obtaining information that eliminates asymmetric information.