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Optimal Control and Hedging of Operations in the Presence of Financial Markets

Author

Listed:
  • René Caldentey

    () (Stern School of Business, New York University, 44 West Fourth Street, New York, New York 10012)

  • Martin Haugh

    () (Department of Industrial Engineering and Operations Research, Columbia University, 331 S.W. Mudd Building, 500 West 120th Street, New York, New York 10027-6902)

Abstract

We consider the problem of dynamically hedging the profits of a corporation when these profits are correlated with returns in the financial markets. In particular, we consider the general problem of simultaneously optimizing over both the operating policy and the hedging strategy of the corporation. We discuss how different informational assumptions give rise to different types of hedging and solution techniques. Finally, we solve some problems commonly encountered in operations management to demonstrate the methodology.

Suggested Citation

  • René Caldentey & Martin Haugh, 2006. "Optimal Control and Hedging of Operations in the Presence of Financial Markets," Mathematics of Operations Research, INFORMS, vol. 31(2), pages 285-304, May.
  • Handle: RePEc:inm:ormoor:v:31:y:2006:i:2:p:285-304
    DOI: 10.1287/moor.1050.0179
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    File URL: http://dx.doi.org/10.1287/moor.1050.0179
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Jian Ni & Lap Keung Chu & Shoude Li, 2018. "Financial hedging and competitive strategy for value-maximizing firms under quantity competition," Annals of Operations Research, Springer, vol. 264(1), pages 391-407, May.
    2. Yuqian Xu & Lingjiong Zhu & Michael Pinedo, 2020. "Operational Risk Management: A Stochastic Control Framework with Preventive and Corrective Controls," Operations Research, INFORMS, vol. 68(6), pages 1804-1825, November.
    3. Liao Wang & David D. Yao, 2017. "Production with Risk Hedging—Optimal Policy and Efficient Frontier," Operations Research, INFORMS, vol. 65(4), pages 1095-1113, August.
    4. Xin Chen & Melvyn Sim & David Simchi-Levi & Peng Sun, 2007. "Risk Aversion in Inventory Management," Operations Research, INFORMS, vol. 55(5), pages 828-842, October.
    5. 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.
    6. Ni, Jian & Chu, Lap Keung & Li, Qiang, 2017. "Capacity decisions with debt financing: The effects of agency problem," European Journal of Operational Research, Elsevier, vol. 261(3), pages 1158-1169.
    7. Mahapatra, Santosh & Levental, Shlomo & Narasimhan, Ram, 2017. "Market price uncertainty, risk aversion and procurement: Combining contracts and open market sourcing alternatives," International Journal of Production Economics, Elsevier, vol. 185(C), pages 34-51.
    8. Panos Kouvelis & Rong Li & Qing Ding, 2013. "Managing Storable Commodity Risks: The Role of Inventory and Financial Hedge," Manufacturing & Service Operations Management, INFORMS, vol. 15(3), pages 507-521, July.
    9. S. Alex Yang & John R. Birge, 2018. "Trade Credit, Risk Sharing, and Inventory Financing Portfolios," Management Science, INFORMS, vol. 64(8), pages 3667-3689, August.
    10. Yuemeng Sun & Johannes Wissel & Peter Jackson, 2016. "Separation results for multi-product inventory hedging problems," Annals of Operations Research, Springer, vol. 237(1), pages 143-159, February.
    11. S. Alex Yang & John R. Birge & Rodney P. Parker, 2015. "The Supply Chain Effects of Bankruptcy," Management Science, INFORMS, vol. 61(10), pages 2320-2338, October.
    12. Li, X. & Zuidwijk, R.A. & de Koster, M.B.M. & Dekker, R., 2016. "Competitive Capacity Investment under Uncertainty," ERIM Report Series Research in Management ERS-2016-005-LIS, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus University Rotterdam.
    13. Balter, Anne G. & Pelsser, Antoon, 2020. "Pricing and hedging in incomplete markets with model uncertainty," European Journal of Operational Research, Elsevier, vol. 282(3), pages 911-925.
    14. Nicola Secomandi & Guoming Lai & François Margot & Alan Scheller-Wolf & Duane J. Seppi, 2015. "Merchant Commodity Storage and Term-Structure Model Error," Manufacturing & Service Operations Management, INFORMS, vol. 17(3), pages 302-320, July.
    15. John R. Birge, 2015. "OM Forum—Operations and Finance Interactions," Manufacturing & Service Operations Management, INFORMS, vol. 17(1), pages 4-15, February.
    16. Qing Ding & Lingxiu Dong & Panos Kouvelis, 2007. "On the Integration of Production and Financial Hedging Decisions in Global Markets," Operations Research, INFORMS, vol. 55(3), pages 470-489, June.
    17. Peter Berling & Victor Martínez-de-Albéniz, 2011. "Optimal Inventory Policies when Purchase Price and Demand Are Stochastic," Operations Research, INFORMS, vol. 59(1), pages 109-124, February.
    18. Michail Anthropelos & Michael Kupper & Antonis Papapantoleon, 2018. "An Equilibrium Model for Spot and Forward Prices of Commodities," Mathematics of Operations Research, INFORMS, vol. 43(1), pages 152-180, February.
    19. Yuemeng Sun & Johannes Wissel & Peter L. Jackson, 2016. "Separation results for multi-product inventory hedging problems," Annals of Operations Research, Springer, vol. 237(1), pages 143-159, February.
    20. Ding, Wen & Wan, Guohua, 2020. "Financing and coordinating the supply chain with a capital-constrained supplier under yield uncertainty," International Journal of Production Economics, Elsevier, vol. 230(C).
    21. 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.
    22. 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.
    23. Hofmann, Erik, 2011. "Risk management in international supply chains: the case of natural hedging," Die Unternehmung - Swiss Journal of Business Research and Practice, Nomos Verlagsgesellschaft mbH & Co. KG, vol. 65(2), pages 155-192.

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