On the Determination of Contract Price in Credit Sales Transaction: Exchange Option Approach

Conditions for credit sales transactions vary to a great degree depending upon characteristics of the commodity, the buyer, and the seller. In this paper, we analyzed the buyer’s right to return purchased commodities and void his or her financial obligations as an exchange option written by the seller and held by the credit buyer. The value of this exchange option is determined by the value of supplied goods and their volatility, the value of bonds and their volatility, and the correlation between the values of the commodity and the bonds. As a result, this paper was able to derive a model that could explain the impact of: (i) characteristics of the commodities; (ii) characteristics of the buyer; (iii) characteristics of the seller; and (iv) changes in market conditions. Besides the progress stated above, we also derived the necessary condition for both the buyer and the seller to be satisfied in a credit sales transaction. Based on this model, a number of empirical hypotheses were made.