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Cash Hedging in a Supply Chain

Author

Listed:
  • Panos Kouvelis

    (Olin Business School, Washington University in St. Louis, St. Louis, Missouri 63130)

  • Xiaole Wu

    (School of Management, Fudan University, Shanghai 200433, China)

  • Yixuan Xiao

    (College of Business, City University of Hong Kong, Kowloon, Hong Kong)

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.

Suggested Citation

  • Panos Kouvelis & Xiaole Wu & Yixuan Xiao, 2019. "Cash Hedging in a Supply Chain," Management Science, INFORMS, vol. 65(8), pages 3928-3947, August.
    • Handle: RePEc:inm:ormnsc:v:65:y:2019:i:8:p:3928-3947
    DOI: 10.1287/mnsc.2017.2997
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    References listed on IDEAS

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