UCL School of Management

Research seminar

A Strategic Approach to Hedging and Contracting


Danko Turcic, Olin Business School, Washington University


Friday, 11 September 2015
15:00 – 16:30
The Torrington Room, Senate House, Malet Street, WC1E 7HE

Both the manufacturer and the assembler face stochastic input costs; in addition, the assembler faces stochastic demand. The firms’ operations are intertwined – i.e., the downstream buyer depends on the upstream supplier for delivery and the supplier depends on the buyer for purchase. We’ll argue that if left unmanaged, the stochastic costs that reverberate through the supply chain can lead to significant financial losses. The situation could deteriorate to the point of a supply disruption if at least one of the supply chain members cannot profitably make its product. We identify conditions under which the risk of the supply chain breakdown will cause the supply chain members to hedge their input costs. In the second part of the talk, we consider a problem of two identical competing manufacturers who face stochastic input costs and who sell a perfectly substitutable product to multiple buyers. We again show that if left unmanaged, stochastic costs can lead to supply disruption. We then show that by hedging, firms can guarantee supply, which allows them to charge premium price for their product. We then identify conditions under which competing firms would choose to guarantee supply in equilibrium. One of the unexpected findings is that although both firms are identical, only one of the firms may choose to guarantee supply in equilibrium. The central theme in both parts is a new rationale for hedging due to strategic interaction among risk-neutral firms.

Open to
PhD Programme
Executive Education: Project Management
Last updated Wednesday, 9 September 2015