Supply Contracts with Financial Hedging

We study the performance of a stylized supply chain where two firms, a retailer and a producer, compete in a Stackelberg game. The retailer purchases a single product from the producer and afterwards sells it in the retail market at a stochastic clearance price. The retailer, however, is budget-constrained and is therefore limited in the number of units that he may purchase from the producer. We also assume that the retailer's profit depends in part on the realized path or terminal value of some observable stochastic process. We interpret this process as a financial process such as a foreign exchange rate or interest rate. More generally the process may be interpreted as any relevant economic index. We consider a variation (the flexible contract) of the traditional wholesale price contract that is offered by the producer to the retailer. Under this flexible contract, at t = 0 the producer offers a menu of wholesale prices to the retailer, one for each realization of the financial process up to a future time . The retailer then commits to purchasing at time a variable number of units, with the specific quantity depending on the realization of the process up to time. Because of the retailer's budget constraint, the supply chain might be more profitable if the retailer was able to shift some of the budget from states where the constraint is not binding to states where it is binding. We therefore consider a variation of the flexible contract where we assume that the retailer is able to trade dynamically between 0 and in the financial market. We refer to this variation as the flexible contract with hedging. We compare the decentralized competitive solution for the two contracts with the solutions obtained by a central planner. We also compare the supply chain's performance across the two contracts. We find, for example, that the producer always prefers the flexible contract with hedging to the flexible contract without hedging. Depending on model parameters, however, the retailer may or may not prefer the flexible contract with hedging. Finally, we study the problem of choosing the optimal timing, of the contract, and formulate this as an optimal stopping problem.Operations Management Working Papers Serie

Mixed contracts for the newsvendor problem with real options

In this paper we consider the newsvendor model with real options. We consider a mixed contract where the retailer can order a combination of q units subject to the conditions in a classical newsvendor contract and Q real options on the same items. We provide a closed form solution to this mixed contract when the demand is discrete and study some of its properties. We also offer an explicit solution for the continuous case. In particular we demonstrate that a mixed contract may be superior to a real option contract when a manufacturer has a bound on how much variance she is willing to accept.Newsvendor model; real options; discrete demand; mixed contract

Imitative Follower Deception in Stackelberg Games

Information uncertainty is one of the major challenges facing applications of game theory. In the context of Stackelberg games, various approaches have been proposed to deal with the leader's incomplete knowledge about the follower's payoffs, typically by gathering information from the leader's interaction with the follower. Unfortunately, these approaches rely crucially on the assumption that the follower will not strategically exploit this information asymmetry, i.e., the follower behaves truthfully during the interaction according to their actual payoffs. As we show in this paper, the follower may have strong incentives to deceitfully imitate the behavior of a different follower type and, in doing this, benefit significantly from inducing the leader into choosing a highly suboptimal strategy. This raises a fundamental question: how to design a leader strategy in the presence of a deceitful follower? To answer this question, we put forward a basic model of Stackelberg games with (imitative) follower deception and show that the leader is indeed able to reduce the loss due to follower deception with carefully designed policies. We then provide a systematic study of the problem of computing the optimal leader policy and draw a relatively complete picture of the complexity landscape; essentially matching positive and negative complexity results are provided for natural variants of the model. Our intractability results are in sharp contrast to the situation with no deception, where the leader's optimal strategy can be computed in polynomial time, and thus illustrate the intrinsic difficulty of handling follower deception. Through simulations we also examine the benefit of considering follower deception in randomly generated games

Proteção Cambial: Interceptos de Pesquisa e Caminhos Futuros / Foreign currency hedge: Research intercepts and future pathways

Práticas corporatvas de proteção cambial auxiliam na suavização de fluxos de caixa futuros e performance financeira, gerando redução de volatilidade e mitigação de riscos. O seminal trabalho de Stulz (1984) disseminou a conhecida teoria positivista de hedge, que busca quantificar os benefícios financeiros na prática de proteção cambial. O presente estudo consiste em uma revisão sistemática de literatura contemporânea sobre a temática de proteção cambial. O objetivo principal consiste na compreensão do tema por meio do estudo de pesquisas recentes, com o intuito de criar interceptos para pesquisas futuras relacionando conteúdo já desenvolvidos, objetos de pesquisa e modelos frequentemente aplicados. O portfólio bibliográfico sistematizado totaliza 73 artigos científicos em língua inglesa publicados entre 2008 e 2018. A análise evidencia o viés empírico-positivista da área financeira, com uma preponderância de estudos quantitativos com dados secundários, usando janelas de tempo entre 5 e 10 anos. Os principais interceptos de pesquisa encontrados são: estudos focados em hedge operacional, maior desenvolvimento da métrica de exposição cambial, estudos aplicados em economia regional e blocos econômicos.

Proteção Cambial: Interceptos de Pesquisa e Caminhos Futuros / Foreign currency hedge: Research intercepts and future pathways

Práticas corporatvas de proteção cambial auxiliam na suavização de fluxos de caixa futuros e performance financeira, gerando redução de volatilidade e mitigação de riscos. O seminal trabalho de Stulz (1984) disseminou a conhecida teoria positivista de hedge, que busca quantificar os benefícios financeiros na prática de proteção cambial. O presente estudo consiste em uma revisão sistemática de literatura contemporânea sobre a temática de proteção cambial. O objetivo principal consiste na compreensão do tema por meio do estudo de pesquisas recentes, com o intuito de criar interceptos para pesquisas futuras relacionando conteúdo já desenvolvidos, objetos de pesquisa e modelos frequentemente aplicados. O portfólio bibliográfico sistematizado totaliza 73 artigos científicos em língua inglesa publicados entre 2008 e 2018. A análise evidencia o viés empírico-positivista da área financeira, com uma preponderância de estudos quantitativos com dados secundários, usando janelas de tempo entre 5 e 10 anos. Os principais interceptos de pesquisa encontrados são: estudos focados em hedge operacional, maior desenvolvimento da métrica de exposição cambial, estudos aplicados em economia regional e blocos econômicos.

Joint logistics and financial services by a 3PL firm

Integrated logistics and financial services have been practiced by third party logistics (3PL) firms for years; however, the literature has been silent on the value of 3PL firms as credit providers in budget-constrained supply chains. This paper investigates an extended supply chain model with a supplier, a budget-constrained retailer, a bank, and a 3PL firm, in which the retailer has insufficient initial budget and may borrow or obtain trade credit from either a bank (traditional role) or a 3PL firm (control role). Our analysis indicates that the control role model yields higher profits not only for the 3PL firm but also for the supplier, the retailer, and the entire supply chain. In comparison with a supplier credit model where the supplier provides the trade credit, the control role model yields a better performance for the supply chain as long as the 3PL firm’s marginal profit is greater than that of the supplier. We further demonstrate that, for all players, both the control role and supplier credit models can outperform the classic newsvendor model without budget constraint

Buy Now and Price Later: Supply Contracts with Time-Consistent Mean-Variance Financial Hedging

We consider a two-stage supply chain comprising one risk-neutral manufacturer (he) and one risk-averse retailer (she), where the manufacturer procures consumption commodities in spot market as major inputs for production and sells the final products to the retailer. The retailer then sells the final products to the market at a stochastic clearance price. We investigate a flexible price contract that allows the manufacturer to determine the product wholesale price, and the retailer to determine the order quantity, based on the future spot price of consumption commodities. Compared with the simple wholesale price contract, a win-win situation can be achieved under the flexible price contract when the manufacturer's postponed processing cost is lower than a threshold. However, under this flexible price contract the retailer may suffer from the commodity price volatility, even if she does not procure the commodities directly. We further investigate how the risk-averse retailer conducts mean-variance financial hedging by purchasing consumption commodity futures contracts. We formulate the problem using a dynamic programming model and derive a closed-form time-consistent financial hedging policy. Through numerical experiments, we show that the commodity price risk from the manufacturer to the retailer is effectively mitigated with the hedging, and the benefits of the flexible price contract are maintained

Equilibrium Financing in a Distribution Channel with Capital Constraint

There exist capital constraints in many distribution channels. We examine a channel consisting of one manufacturer and one retailer, where the retailer is capital constrained. The retailer may fund its business by borrowing credit either from a competitive bank market or from the manufacturer, provided the latter is willing to lend. When only one credit type (either bank or trade credit) is viable, we show that trade credit financing generally charges a higher wholesale price and thus becomes less attractive than bank credit financing for the retailer. When both bank and trade credits are viable, the unique equilibrium is trade credit financing if production cost is relatively low but is bank credit financing otherwise. We also study the case where both the retailer and the manufacturer are capital constrained and demonstrate that, to improve the overall supply chain efficiency, the bank should finance the manufacturer if production cost is low but finance the retailer otherwise. Our analysis further suggests that the equilibrium region of trade credit financing shrinks as demand variability or the retailer\u27s internal capital level increases