Abstract: A supply chain contract mode is a market-oriented vertical product integration process from its production to sales. In the market economy, the execution of contracts is to maxmize profits, based on the assumptions of risk-neutral and fully rational game players. However, in a much volatile market, adverse selection and moral risk will occur when one player get losses under the normal supply chain contract mode. Therefore, high default rates for supply chain contracts will be vital to refrain from their executions without effective risk-sharing and behavior-constraint mechanisms. In this paper, the stability of supply chain contract modes are studied and optimization strategies are offered. Firstly, static game model is explored to obtain scopes of price fluctuations for supply chain contract modes. Secondly, detailed analysis is given to the impact of decision parameters on the stability of contract. Finally, a risk externality channel is sought to concert profit conflicts between contract parties, with the help of risk hedge function in options market. This no doubt offers a new prospective to solve the problem os high default rates in supply chain contract modes. Results show that such governance mechanisms as higher credits of contract parties, higher economic punishment coefficients, or more powerful default implementation measures, can help improve performance rates to some extent. But they can hardly eradicate market risks and occurrence of defaults. To solve high default rates for supply chain contract modes, it is vital to seek risk externality channel to coordinate the conflict of interest, with the help of risk treatment and prevention mechanisms in financial markets. As a result, market risk for supply chains can effectively be resolved in the options markets. From perspective of option games, by paying certain premiums under supply chain contract modes, supplier can effectively avoid market risks and meanwhile obtain benefits of rising prices. Manufacturers can fulfil steady efficient operations with higher incomes and more reliable supply stability.

Key words: option, game, supply chain contract, stability