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Mean-Variance Newsvendor Model with Random Supply and Financial Hedging

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  • M. Tekin
  • S. Özekici

Abstract

In this paper, we follow a mean-variance (MV) approach to the newsvendor model. Unlike the risk-neutral newsvendor that is mostly adopted in the literature, the MV newsvendor considers the risks in demand as well as supply. We further consider the case where the randomness in demand and supply is correlated with the financial markets. The MV newsvendor hedges demand and supply risks by investing in a portfolio composed of various financial instruments. The problem therefore includes both the determination of the optimal ordering policy and the selection of the optimal portfolio. Our aim is to maximize the hedged MV objective function. We provide explicit characterizations on the structure of the optimal policy. We also present numerical examples to illustrate the effects of risk-aversion on the optimal order quantity and the effects of financial hedging on risk reduction.

Suggested Citation

  • M. Tekin & S. Özekici, 2015. "Mean-Variance Newsvendor Model with Random Supply and Financial Hedging," IISE Transactions, Taylor & Francis Journals, vol. 47(9), pages 910-928, September.
    • Handle: RePEc:taf:uiiexx:v:47:y:2015:i:9:p:910-928
    DOI: 10.1080/0740817X.2014.981322
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    Citations

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    Cited by:

    1. Juzhi Zhang & Suresh P. Sethi & Tsan‐Ming Choi & T. C. E. Cheng, 2020. "Supply Chains Involving a Mean‐Variance‐Skewness‐Kurtosis Newsvendor: Analysis and Coordination," Production and Operations Management, Production and Operations Management Society, vol. 29(6), pages 1397-1430, June.
    2. Felix T. S. Chan & Xinsheng Xu, 2019. "The Loss-Averse Retailer’s Order Decisions Under Risk Management," Mathematics, MDPI, vol. 7(7), pages 1-16, July.
    3. Choi, Tsan-Ming & Liu, Na, 2019. "Optimal advertisement budget allocation and coordination in luxury fashion supply chains with multiple brand-tier products," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 130(C), pages 95-107.
    4. Choi, Tsan-Ming & Ma, Cheng & Shen, Bin & Sun, Qi, 2019. "Optimal pricing in mass customization supply chains with risk-averse agents and retail competition," Omega, Elsevier, vol. 88(C), pages 150-161.
    5. Liu, Zugang & Wang, Jia, 2019. "Supply chain network equilibrium with strategic financial hedging using futures," European Journal of Operational Research, Elsevier, vol. 272(3), pages 962-978.
    6. Alavi Fard, Farzad & He, Jian & Ivanov, Dmitry & Jie, Ferry, 2019. "A utility adjusted newsvendor model with stochastic demand," International Journal of Production Economics, Elsevier, vol. 211(C), pages 154-165.
    7. Yu, Yugang & Zhou, Sijie & Shi, Ye, 2020. "Information sharing or not across the supply chain: The role of carbon emission reduction," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 137(C).
    8. Choi, Tsan-Ming & Zhang, Ting, 2023. "Will being an angel bring more harm than good? Altruistic newsvendors with different risk attitudes," European Journal of Operational Research, Elsevier, vol. 305(3), pages 1153-1165.
    9. Choi, Tsan-Ming, 2018. "Launching the right new product among multiple product candidates in fashion: Optimal choice and coordination with risk consideration," International Journal of Production Economics, Elsevier, vol. 202(C), pages 162-171.

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