3rd European International Conference on Industrial Engineering and Operations Management

Exchange Rate Risk Hedging for a Global Supply Chain of Nonstorable Commodity in Presence of a Spot Market

Yinping Mu, Xiaoqiang Cai & Xiaowo Tang
Publisher: IEOM Society International
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Track: Sustainable Operations and Supply Chain Management

Exchange rate fluctuation increases the risk of global supply chain management. In this paper, we study a global supply chain of a nonstorable commodity, which involves transactions to be settled at a foreign currency between a manufacturer and a supplier. Both parties are risk-averse, and they negotiate a supply contract through a Nash bargaining process. To hedge against the exchange rate risk, they can purchase forward exchange rates in the financial market. In addition, the manufacturer can also procure the commodity from a local supplier.  This avoids the exchange rate risk, but incurs another risk because the quantity available from the local supplier is not very certain. We formulate the problem as a Nash bargaining game where the two players have mean-variance preferences over their profits. We derive the unique equilibrium supply contract under a random exchange rate and a random local supply,  from which we characterize the optimal forward exchange rate level and the local procurement level.

Published in: 3rd European International Conference on Industrial Engineering and Operations Management, Pilsen, Czech Republic

Publisher: IEOM Society International
Date of Conference: July 23-26, 2019

ISBN: 978-1-5323-5949-1
ISSN/E-ISSN: 2169-8767