Integrated Production and Risk Hedging with Financial Instruments

Haksöz, Çağrı; Seshadri, Sridhar

Abstract

This chapter reviews the existing literature on integrated production and risk hedging using financial instruments such as forwards/futures and options for a risk averse firm in single and multiperiod settings. It illustrates the value of hedging joint price, basis, and yield risks using forwards/futures and options. The chapter focuses on a procurement problem for a risk neutral commodity producer who sells to its buyer (with a stochastic demand) via a long-term fixed-price contract, and trades intelligently in the spot market for the commodity. It solves a continuous time, infinite horizon stochastic control problem in order to determine the optimal policy for production and spot market trading. The chapter demonstrates the implications of basis and yield risks on optimal production and hedging decisions.

Citation

Haksöz, Ç., & Seshadri, S. (2011). Integrated Production and Risk Hedging with Financial Instruments. In P. Kouvelis, O. Boyabatli, L. Dong, & R. Li (Eds.), Handbook of Integrated Risk Management in Global Supply Chains. John Wiley and Sons

• Publication Date: 2011
• Deposit Date: Sep 25, 2019
• Book Title: Handbook of Integrated Risk Management in Global Supply Chains.
• Public URL: https://durham-repository.worktribe.com/output/1630865
• Related Public URLs: https://www.researchgate.net/publication/258452210_Integrated_Production_and_Risk_Hedging_with_Financial_Instruments