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

• 成果类型: Article
• 署名作者: Xing, Wei; Ma, Shanshan; Zhao, Xuan; Liu, Liming
• 署名单位: China University of Petroleum; Shanghai Lixin University of Accounting & Finance; Wilfrid Laurier University; Southern University of Science & Technology
• 刊物名称: PRODUCTION AND OPERATIONS MANAGEMENT
• ISSN/ISSBN: 1059-1478
• DOI: 10.1111/poms.13748
• 发表日期: 2022
• 页码: 3233-3263
• 关键词: competition; Financial; Operational hedging; long-term contract; risk management; spot market

摘要

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.