Financial and Operational Risk Management: Inventory Effects in the Gold Mining Industry
38 Pages Posted: 27 Jun 2018 Last revised: 1 Oct 2019
Date Written: September 2019
Financial and operational risk management are central concepts at the intersection of finance, operations, and commodity risk management. Prior research has examined the effects of either financial or operational risk management, yet evidence on the implications for a joint risk management strategy is lacking. We use a fine-grained data set comprising the financial and operational risk management decisions of 58 gold miners from 2003 to 2011 to empirically assess the effects of risk management on inventory. Faced with volatile output prices, gold miners may commit to sell future gold production and lock in prices, but this strategy precluded miners from benefiting from increasing gold prices. They may also manage costs by varying the quality of ore they extract and process, but this is associated with an increase in inventory. We find that the strategies force miners to make financial and operational trade-offs, but that joint implementation of the two may negate these consequences.
Keywords: financial risk management; operational risk management; inventory; gold mining; empirical OM
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