Optimal investment in product-flexible manufacturing capacity
Management Science
Inventory control with an exponential utility criterion
Operations Research
The risk-averse (and prudent) newsboy
Management Science
Investment Strategies for Flexible Resources
Management Science
Impact of Uncertainty and Risk Aversion on Price and Order Quantity in the Newsvendor Problem
Manufacturing & Service Operations Management
Newsvendor Networks: Inventory Management and Capacity Investment with Discretionary Activities
Manufacturing & Service Operations Management
On the Value of Mix Flexibility and Dual Sourcing in Unreliable Newsvendor Networks
Manufacturing & Service Operations Management
Hedging Inventory Risk Through Market Instruments
Manufacturing & Service Operations Management
Optimal Control and Hedging of Operations in the Presence of Financial Markets
Mathematics of Operations Research
Risk Aversion in Inventory Management
Operations Research
Integrating Long-Term and Short-Term Contracting in Beef Supply Chains
Management Science
Managing Storable Commodity Risks: The Role of Inventory and Financial Hedge
Manufacturing & Service Operations Management
Plant Networks for Processing Recyclable Materials
Manufacturing & Service Operations Management
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We consider a firm that invests in capacity under demand uncertainty and thus faces two related but distinct types of risk: mismatch between capacity and demand and profit variability. Whereas mismatch risk can be mitigated with greater operational flexibility, profit variability can be reduced through financial hedging. We show that the relationship between these two risk mitigating strategies depends on the type of flexibility: Product flexibility and financial hedging tend to be complements (substitutes)---i.e., product flexibility tends to increase (decrease) the value of financial hedging, and, vice versa, financial hedging tends to increase (decrease) the value of product flexibility---when product demands are positively (negatively) correlated. In contrast to product flexibility, postponement flexibility is a substitute to financial hedging as intuitively expected. Although our analytical results assume perfect flexibility and perfect hedging and rely on a linear approximation of the value of hedging, we validate their robustness in an extensive numerical study.