Application of the Collateralized Debt Obligation (CDO) Approach for Managing Inventory Risk in the Classical Newsboy Problem

10.6702/ijbi.2011.6.1.2

Rina Isogai；Satoshi Ohashi；Ushio Sumita

Collateralized debt obligation ； risk control ； newsboy problem ； value at risk

International Journal of Business and Information

6卷1期（2011 / 06 / 01）

35 - 76

英文

In the midst of the ongoing world financial crisis, the Collateralized Debt Obligation (CDO) became notorious for playing a major role in the decline. The fact that misuse of the CDO resulted in collapse of the world economy, however, does not necessarily imply that the CDO itself is hazardous. This paper explores the potential of the CDO approach for controlling general risks, by applying it to the classical Newsboy Problem (NBP). The underlying opportunity loss of NBP replaces the credit risk of CDO. For Value at Risk (VaR) problems formulated without or with CDO, extensive numerical experiments reveal that the overall effect of CDO is rather limited. It could be effective, however, if (i) the underlying risk is high in that the variability of the stochastic demand D is substantially large; (ii) the expected profit should be held above a high level; (iii) the probability of having a huge loss should be contained; and (iv) the detachment point K(subscript d) should be held relatively low.

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