Seven. Integrated Production and Risk Hedging with Financial Instruments

  1. Panos Kouvelis3,
  2. Lingxiu Dong3,
  3. Onur Boyabatli4 and
  4. Rong Li4
  1. Ccedil;ağri Haksöz1 and
  2. Sridhar Seshadri2

Published Online: 11 OCT 2011

DOI: 10.1002/9781118115800.ch7

The Handbook of Integrated Risk Management in Global Supply Chains

The Handbook of Integrated Risk Management in Global Supply Chains

How to Cite

Haksöz, C. and Seshadri, S. (2011) Integrated Production and Risk Hedging with Financial Instruments, 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.ch7

Editor Information

  1. 3

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

  2. 4

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

Author Information

  1. 1

    Faculty of Management, Sabancı University, İstanbul, Turkey

  2. 2

    McCombs School of Business, The University of Texas, Austin, Texas, USA

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:

  • financial instruments;
  • integrated production;
  • production planning;
  • risk hedging

Summary

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.

Controlled Vocabulary Terms

Cash market; Financial instruments; Production and operations management; Risk management