We have thus shown through Monte-Carlo simulations, that the benefits of pooling will increase with the number of locations and that the benefits of risk pooling can be calculated without knowing the closed form of the demand distribution.
Good inventory management is essential to the successful operation for most organizations both because of the amount of money the inventory represents and the impact that inventories have on the daily operations.
Normally we would expect both the budget and the actual EBITDA to fall somewhere in the region of the expected value.
There are a large number of methods used for forecasting ranging from judgmental thru expert systems and time series to causal methods.
We are here looking for hedge models and hedge ratio estimations techniques that are “good enough” and that can fit into valuation models using Monte Carlo simulation. The model have to be dynamic in the sense that as new data (contracts) becomes available it can read the data, perform the necessary statistical analysis, produce the hedging coefficients and do the simulations – in one go.
In the following we will illustrate some of the risks the bioethanol producer is facing using corn as feedstock. However, these risks will persist regardless of the feedstock and production process chosen.