Production Planning with Risk Hedging

We study production planning integrated with risk hedging in a continuous-time stochastic setting. The (cumulative) demand process is modeled as a sum of two components: the demand rate is a general function in a tradable financial asset (which follows another stochastic process), and the noise component follows an independent Brownian motion. There are two decisions: a production quantity decision at the beginning of the planning horizon, and a dynamic hedging strategy throughout the horizon. Thus, the total terminal wealth has two components: production payoff, and profit/loss from the hedging strategy. The production quantity and hedging strategy are jointly optimized under the mean-variance and the shortfall criteria. For each risk objective, we derive the optimal hedging strategy in closed form and express the associated minimum risk as a function of the production quantity, the latter is then further optimized. With both production and hedging (jointly) optimized, we provide a complete characterization of the efficient frontier. By quantifying the risk reduction contributed by the hedging strategy, we demonstrate its substantial improvement over a production-only decision. To derive the mean-variance hedging strategy, we use a numeraire-based approach, and the derived optimal strategy consists of a risk mitigation component and an investment component. For the shortfall hedging, a convex duality method is used, and the optimal strategy takes the form of a put option and a digital option, which combine to close the gap from the target left by production (only). Furthermore, we extend the models and results by allowing multiple products, with demand rates depending on multiple assets. We also make extension by allowing the asset price to follow various stochastic processes (other than the geometric Brownian motion)

A decision model for natural oil buying policy under uncertainty

A manufacturer, in a fast moving consumer goods industry, buys Natural oils from a number of oil suppliers world-wide. The prices of these oils are the major raw material cost in producing the consumer goods, which are also sold world-wide. The volatility in the international prices of the Natural oils has signi¯cant impact on the planning and budgets decisions. Since the oils are bought and the ¯nished products are sold in markets throughout the world, the manufacturer is exposed to a variety of market uncertainties and the resulting risks. These uncertainties are the raw material prices, the demand and the therefore the selling prices for the finished goods- all of which influence the profitability of the manufacturing firm. The risks can be minimised by entering into futures contract of appropriate duration, that is, by following a schedule of "forward"' purchase of oil (with specific series of future delivery dates) with the oil suppliers. We formulate this problem as a two-stage Stochastic Program (SP) using the futures and the spot prices for the Natural oil. This SP model gives robust decisions that hedge against the uncertainties in the Natural oil prices and the demand for the finished products. The uncertainty in the oil prices and the demand are modelled through a scenario generator. We have constructed a decision support system (DSS) that integrates the SP model, the scenario generator and the solution algorithm. This DSS also provides the decision maker a profile of the risk and return exposures for different policies

Developing methods for strategic evaluation in agricultural research and production

We analyze instruments to evaluate investment strategies as new options for co-operatives within the wheat production chain. Using a value-based management the extension of our concept, a “cooperative balanced scorecard” is discussed as we propose the further differentiation of the scorecard’s financial perspective. This is a market development-driven approach as cooperatives may be regarded as commodity-price-intermediators for their members. Proposing this approach we use a simple model of conjoint-hedging in intermediating firms within agribusiness.Agribusiness, Wheat Production, Cooperatives, Intermediation, Value-based Management, Commodity Markets., Agricultural and Food Policy,

A Hedged Monte Carlo Approach to Real Option Pricing

In this work we are concerned with valuing optionalities associated to invest or to delay investment in a project when the available information provided to the manager comes from simulated data of cash flows under historical (or subjective) measure in a possibly incomplete market. Our approach is suitable also to incorporating subjective views from management or market experts and to stochastic investment costs. It is based on the Hedged Monte Carlo strategy proposed by Potters et al (2001) where options are priced simultaneously with the determination of the corresponding hedging. The approach is particularly well-suited to the evaluation of commodity related projects whereby the availability of pricing formulae is very rare, the scenario simulations are usually available only in the historical measure, and the cash flows can be highly nonlinear functions of the prices.Comment: 25 pages, 14 figure

Linking marketing choices with farming practices of grain producers: A farm level modeling approach applied to the South-west of France

With the increasing commodity prices volatility over the last years and the successive agricultural policy reforms, European grain producers face greater uncertainty. To better understand consequences of a price risk increase on production decisions, marketing decisions and farm revenue as well as linkage between production and marketing decisions, we develop a multiperiodic risk farm model. Production decisions concern selections of crop mix and farming practices (conventional or integrated farming) while marketing decisions focus on four types of pricing arrangements. The model is applied to a representative farmer of a region located in the Southwest of France. The results exposed in this paper shows that with a price risk increase, production adjustments of a risk averse farmer are oriented toward less risky (environmentally friendly) farming practices unless marketing contracts allow to mitigate price risk.multiperiod farm model, marketing contracts, risk, common agricultural policy, Agricultural and Food Policy, Farm Management,

Investment in new power generation in New South Wales: Comments by Public Service International Research Unit, University of Greenwich, London

This report comments on the prospects for new generation investment in New South Wales, in particular, what the role of the public sector should be