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Foreign exchange transaction exposure in a newsvendor setting

Author

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  • Arcelus, F.J.
  • Gor, Ravi
  • Srinivasan, G.

Abstract

Transaction exposure normally arises when there exists a time lag between the time the financial obligation has been incurred and the time it is due to be settled, because the purchase price to the buyer/retailer may, on settlement day, differs from that when it was incurred, if the debt is denominated in the supplier/manufacturer’s currency. This is due to possible unexpected changes in the exchange rates during the time period. In this paper, we show that, in a newsvendor setting, when the risk-neutral supplier/manufacturer has full information, the optimal policies are independent of which side bears the exchange risk, if the retailer is not a risk-taker. If, on the other hand, the retailer is a risk-taker, it is better for the manufacturer that the retailer assumes the risk. Numerical examples are also presented to highlight model sensitivities to parametric changes.

Suggested Citation

  • Arcelus, F.J. & Gor, Ravi & Srinivasan, G., 2013. "Foreign exchange transaction exposure in a newsvendor setting," European Journal of Operational Research, Elsevier, vol. 227(3), pages 552-557.
    • Handle: RePEc:eee:ejores:v:227:y:2013:i:3:p:552-557
    DOI: 10.1016/j.ejor.2012.10.014
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    References listed on IDEAS

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