A framework of hedging decisions for supply chain partners

Research output: Journal Publications and Reviews (RGC: 21, 22, 62)21_Publication in refereed journalpeer-review

1 Scopus Citations
View graph of relations


Related Research Unit(s)


Original languageEnglish
Pages (from-to)189-200
Journal / PublicationFoundations and Trends in Technology, Information and Operations Management
Issue number2-3
Online published14 Mar 2019
Publication statusPublished - 2019


We study cash flow risk hedging in a bilateral supply chain of a supplier and a manufacturer that use internal cash to invest in production efficiency improvements. The associated production efficiency function is convex in capital investment. We offer a conceptual framework for understanding supply chain cash hedging strategies by decomposing the difference of a firm's expected profit of hedging versus not hedging into a sum of two terms: the cost reduction effect and the flexibility effect of hedging. We find that the correlation of cash flow risks of supply chain partners significantly affects the hedging decisions of firms via impacts on production efficiencies. When the cash flows of firms are independent, the cost reduction effect favors hedging, whereas the flexibility effect favors not hedging. A firm is more likely to hedge when the supply chain is more profitable or its supply chain partner hedges. When the cash flows of firms are correlated, the cost reduction and flexibility effect of hedging may complement each other and support the same hedging choice. The impact of market size on firms' hedging decisions is contingent on the cash flow correlation.

Bibliographic Note

Full text of this publication does not contain sufficient affiliation information. With consent from the author(s) concerned, the Research Unit(s) information for this record is based on the existing academic department affiliation of the author(s).