Production and Operations Management
The authors of this paper outline a capacity planning problem in which a risk-averse firm reserves capacities with potential suppliers that are located in multiple low-cost countries. While demand is uncertain, the firm also faces multi-country foreign currency exposures. This study develops a mean-variance model that maximizes the firm’s optimal utility and derives optimal utility and optimal decisions in capacity and financial hedging size. The authors show that when demand and exchange rate risks are perfectly correlated, a risk- averse firm, by using financial hedging, will achieve the same optimal utility as a risk-neutral firm. In this paper as well, a special case is examined regarding two suppliers in China and Vietnam. The results show that if a single supplier is contracted, financial hedging most benefits the highly risk-averse firm when the demand and exchange rate are highly negatively related. When only one hedge is used, financial hedging dominates operational hedging only when the firm is very risk averse and the correlation between the two exchange rates have become positive. With both theoretical and numerical results, this paper concludes that the two hedges are strategic tools and interact each other to maximize the optimal utility.
Copyright © 2013, Production and Operations Management Society.
John Wiley & Sons, Inc.
Place of Publication
Chen, Lijian; Li, Shanling; and Wang, Letian, "Capacity Planning with Financial and Operational Hedging in Low‐Cost Countries" (2014). MIS/OM/DS Faculty Publications. 5.
Business Administration, Management, and Operations Commons, Databases and Information Systems Commons, Management Information Systems Commons, Management Sciences and Quantitative Methods Commons, Operations and Supply Chain Management Commons, Other Computer Sciences Commons