Joint optimal ordering and weather hedging decisions : Mean-CVaR model

Research output: Journal Publications and ReviewsRGC 21 - Publication in refereed journalpeer-review

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Original languageEnglish
Pages (from-to)1-25
Journal / PublicationFlexible Services and Manufacturing Journal
Issue number1
Publication statusPublished - Mar 2011
Externally publishedYes


This paper considers the problem of hedging inventory risk for a seasonal product whose demand is sensitive to weather conditions, such as the average seasonal temperature. The newsvendor not only decides the order quantity, but also adopts a weather hedging strategy. A typical hedging strategy is to use an option (weather derivative) that is constructed on a weather index before the season begins, which will compensate the buyer of the option if the actual seasonal weather index is above (or below) a given strike level. We adopt the risk measure of Conditional-Value at Risk (CVaR) and explore the joint decision problem in mean-CVaR criterion. We find that the weather derivative hedging can increase order quantity. Furthermore, it can help the risk-averse newsvendor improve both expected overall and downside profits. © 2011 Springer Science+Business Media, LLC.

Research Area(s)

  • Mean-CVaR, Newsvendor, Weather option, Weather risk hedging