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Commodity supply chain network equilibrium under bilateral risk hedging

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  • Zhou, Xiaoyang
  • Zhao, Nana
  • Feng, Pingping
  • Zhang, Ding
  • Lev, Benjamin

Abstract

Firms in the commodity industry are not only faced with increasingly fierce competition, but are also exposed to price risks on both supply and demand sides. This paper examines operational and futures trading decisions for raw materials and finished products by classifying bilateral spot-futures price correlations into three types (same-side, parallel, and cross) and proposing a two-stage stochastic supply chain network equilibrium model. The analytical results under duopolistic competition show that the bilateral hedging strategy can provide a firm with an advantage in increasing market share and profits when integrated with operational decisions. Further numerical analysis reveals that this advantage can either amplify or diminish depending on price correlations. Moreover, to analyze multi-competitor scenarios, we conduct simulations across varying market structures using realistic data. Our results show that widespread adoption of bilateral hedging intensifies competition and erodes its advantage. When a firm enhances the completeness of its hedging strategy, this adversely affects all other market participants. This paper presents the first systematic study of how competitive operational and financial decisions interact under bilateral risk hedging.

Suggested Citation

  • Zhou, Xiaoyang & Zhao, Nana & Feng, Pingping & Zhang, Ding & Lev, Benjamin, 2026. "Commodity supply chain network equilibrium under bilateral risk hedging," European Journal of Operational Research, Elsevier, vol. 331(3), pages 770-789.
    • Handle: RePEc:eee:ejores:v:331:y:2026:i:3:p:770-789
    DOI: 10.1016/j.ejor.2025.09.025
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