Cash Hedging in a Supply Chain
46 Pages Posted: 18 Oct 2017
Date Written: October 17, 2017
Abstract
We study hedging cash flow risks in a supply chain where firms invest internal funds to improve production efficiencies. We offer a decomposition framework to capture the cost reduction and flexibility effect of hedging. It allows us to understand how a firm’s hedging choice depends on its supply chain partner’s decision, and how such interaction is affected by supply chain characteristics such as market size, cash flow volatility and correlation. When firms’ cash flows are independent of each other, they are more likely to hedge with a larger market size. When cash flows are correlated, the impact of market size and volatility on firms’ hedging decisions presents multiple patterns, contingent on whether their risks amplify or offset each other.
Keywords: Hedging, Supply Chain, Risk Management, Flexibility
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