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Minimum-Variance Hedging for Managing Risks in Inventory Models with Price Fluctuations

Author

Listed:
  • Canyakmaz, Caner
  • Karaesmen, Fikri
  • Özekici, Süleyman

Abstract

We consider the financial hedging of a random operational cash flow that arises in inventory operations with price and demand uncertainty. We use a variance minimization approach to find a financial portfolio that would minimize the total variance of operational and financial returns. For inventory models that involve continuous price fluctuations and price-dependent demand that arrives in continuous time, we characterize the minimum-variance hedging policies and numerically illustrate their effectiveness.

Suggested Citation

  • Canyakmaz, Caner & Karaesmen, Fikri & Özekici, Süleyman, 2017. "Minimum-Variance Hedging for Managing Risks in Inventory Models with Price Fluctuations," Foundations and Trends(R) in Technology, Information and Operations Management, now publishers, vol. 11(1-2), pages 107-123, December.
    • Handle: RePEc:now:fnttom:0200000073
    DOI: 10.1561/0200000073
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    Cited by:

    1. Canyakmaz, Caner & Özekici, Süleyman & Karaesmen, Fikri, 2024. "Risk management through financial hedging in inventory systems with stochastic price processes," International Journal of Production Economics, Elsevier, vol. 270(C).

    More about this item

    Keywords

    Operational risk management; Contingency planning; Commodity price risk; Supply chain disrutpions;
    All these keywords.

    JEL classification:

    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • M11 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - Production Management

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