Operational hedging or financial hedging? Strategic risk management in commodity procurement

Xing, Wei1; Ma, Shanshan2; Zhao, Xuan3,4; Liu, Liming4

2022-06-01

10.1111/poms.13748

PRODUCTION AND OPERATIONS MANAGEMENT   影响因子和分区

1059-1478

1937-5956

We study the risk management strategies of two manufacturers that procure a commodity from a supplier to produce a final product and compete in a downstream market. The manufacturers can adopt financial hedging to reduce profit variability or spot trading to mitigate the demand-supply mismatch risk, and they can also combine these two strategies or adopt neither of them. We characterize the equilibria of several representative games where two different risk management strategies are available, and find that financial hedging complements spot trading by protecting both contract procurement and spot trading from the demand uncertainty and spot price volatility. Hence, the combined strategy brings a synergy benefit and dominates spot trading; however, it cannot always outperform financial hedging because the price risk introduced by spot trading overwhelms its benefits. Interestingly, asymmetric risk management equilibria may arise between symmetric manufacturers because the sequential production competition under strategy differentiation allows them to better utilize their respective strategies. We further find that when all four strategies are simultaneously available, financial hedging should normally be adopted, whereas spot trading should not be used alone. Finally, we complement our theoretical analysis with a real-data-calibrated numerical study to show which risk management strategy performs better in the soybean processing industry.

competition financial operational hedging long-term contract risk management spot market

SCI

英语

通讯

Natural Science and Engineering Research Council of Canada[2018-06690] ; National Natural Science Foundation of China[72071210,72001143] ; Ministry of Education, Humanities and Social Sciences research project of China[20YJC630100] ; Natural Science Foundation of Shandong Province[ZR2020MG009]

Engineering ; Operations Research & Management Science

Engineering, Manufacturing ; Operations Research & Management Science

WOS:000815593700001

WILEY

ENGINEERING

Web of Science

1.China Univ Petr Huadong, Sch Econ & Management, Qingdao, Peoples R China
2.Shanghai Lixin Univ Accounting & Finance, Sch Business Adm, Shanghai, Peoples R China
3.Wilfrid Laurier Univ, Lazaridis Sch Business & Econ, Waterloo, ON N2L 3C5, Canada
4.Southern Univ Sci & Technol, Sch Business, Shenzhen, Peoples R China

Xing, Wei,Ma, Shanshan,Zhao, Xuan,et al. Operational hedging or financial hedging? Strategic risk management in commodity procurement[J]. PRODUCTION AND OPERATIONS MANAGEMENT,2022.

Xing, Wei,Ma, Shanshan,Zhao, Xuan,&Liu, Liming.(2022).Operational hedging or financial hedging? Strategic risk management in commodity procurement.PRODUCTION AND OPERATIONS MANAGEMENT.

Xing, Wei,et al."Operational hedging or financial hedging? Strategic risk management in commodity procurement".PRODUCTION AND OPERATIONS MANAGEMENT (2022).