Abstract: In this paper, in view of the application of option contract in supply chain under market demand and price instability, how risk-averse suppliers design the option contract model to maximize the profit is studied. When there is uncertainty or random demand in the supply chain, the risk is more prominent. Option contract is an effective tool to prevent risk. Through the introduction of real options in the two level supply chain, the risk caused by the uncertainty of the buyer's demand will be transferred to the supplier, and the risk of the party is passed from the option contract. The extra profit, which is from the option contract model presented in the paper, is used to balance the risk. In the analysis of the collaborative decision scheme that does consider the option factors, the optimal profit maximization model of the option contract is constructed under the circumstances that market demand changes in the random distribution state. Numerical calculation examples verify the feasibility of the option contract strategy model. This research improves the risk-averse model of the option contract in the supply chain to a certain extent, and provides a useful practical reference value for the decision basis of the risk management of the supply chain enterprises.

Key words: stochastic demand, risk-averse, collaborative decision making, option contract