Supply chain information sharing in a macro prediction market
Decision Support Systems
Optimal Control and Hedging of Operations in the Presence of Financial Markets
Mathematics of Operations Research
Operational Flexibility and Financial Hedging: Complements or Substitutes?
Management Science
On the Pricing of Natural Gas Pipeline Capacity
Manufacturing & Service Operations Management
Securitization and Real Investment in Incomplete Markets
Management Science
Financing newsvendor inventory
Operations Research Letters
Manufacturing & Service Operations Management
Managing Storable Commodity Risks: The Role of Inventory and Financial Hedge
Manufacturing & Service Operations Management
| Hi-index | 0.00 |
We address the problem of hedging inventory risk for a short life cycle or seasonal item when its demand is correlated with the price of a financial asset. We show how to construct optimal hedging transactions that minimize the variance of profit and increase the expected utility for a risk-averse decision maker. We show that for a wide range of hedging strategies and utility functions, a risk-averse decision maker orders more inventory when he or she hedges the inventory risk. Our results are useful to both risk-neutral and risk-averse decision makers because (1) the price information of the financial asset is used to determine both the optimal inventory level and the hedge, (2) this enables the decision maker to update the demand forecast and the financial hedge as more information becomes available, and (3) hedging leads to lower risk and higher return on inventory investment. We illustrate these benefits using data from a retailing firm.