Six. Managing Storable Commodity Risks: Role of Inventories and Financial Hedges

  1. Panos Kouvelis2,
  2. Lingxiu Dong2,
  3. Onur Boyabatli3 and
  4. Rong Li3
  1. Panos Kouvelis2,
  2. Rong Li3 and
  3. Qing Ding1

Published Online: 11 OCT 2011

DOI: 10.1002/9781118115800.ch6

The Handbook of Integrated Risk Management in Global Supply Chains

The Handbook of Integrated Risk Management in Global Supply Chains

How to Cite

Kouvelis, P., Li, R. and Ding, Q. (2011) Managing Storable Commodity Risks: Role of Inventories and Financial Hedges, in The Handbook of Integrated Risk Management in Global Supply Chains (eds P. Kouvelis, L. Dong, O. Boyabatli and R. Li), John Wiley & Sons, Inc., Hoboken, NJ, USA. doi: 10.1002/9781118115800.ch6

Editor Information

  1. 2

    Olin Business School, Washington University, St. Louis, Missouri, USA

  2. 3

    Lee Kong Chian School of Business, Singapore Management University, Singapore

Author Information

  1. 1

    Singapore Management University, Singapore

  2. 2

    Olin Business School, Washington University, St. Louis, Missouri, USA

  3. 3

    Lee Kong Chian School of Business, Singapore Management University, Singapore

Publication History

  1. Published Online: 11 OCT 2011
  2. Published Print: 4 NOV 2011

ISBN Information

Print ISBN: 9780470535127

Online ISBN: 9781118115800

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Keywords:

  • commodity risk;
  • financial hedging;
  • operational hedge;
  • optimal policy

Summary

Too many hedging programs target the nominal risks of ‘soiled’ businesses rather than a company’s net economic exposure-aggregated risk across the broad enterprise that also includes the indirect risks. This chapter resolves this problem by integrating the financial hedge, which is typically used to hedge the commodity price risk, and the operational hedge. It dynamically maximizes the total cash flow under mean-variance (MV) criteria to determine time-consistent optimal policies for inventory and financial hedging portfolios. The chapter reviews relevant literature, and introduces all relevant notation and important assumptions for multiperiod model. It formally states the model and provides the optimal inventory and hedging policies for the case of a single hedge being used across all periods. The chapter offers insights on the role and impact of operational and financial hedges on profitability, cash flow variances, and service levels. It outlines two numerical examples of model application and results.

Controlled Vocabulary Terms

Commodity risk; Inventory management