Global Supply Chain Risk Management through Operational and Financial Hedges

This thesis comprises two papers that investigate the impact of operational and/or financial hedging on risk management in a global supply chain environment. The problems are derived from the current climate in which many North American firms are heavily contracting overseas suppliers located in China, India, Vietnam and other countries. The theoretical and numerical results obtained in this thesis provide managerial insights to mitigate demand and exchange rate risks in outsourcing in the event that firms are risk averse.;The second paper expands on the first paper by including financial hedging strategy. It studies a capacity planning problem in which a risk-averse firm plans to reserve capacities with potential suppliers located in multiple countries to hedge demand and exchange rate risks. It provides both analytical and numerical results from a general model with n suppliers, as well as a special case with two suppliers in China and Vietnam. With financial hedging, the risk-averse firm has access to financial markets so that it is able to adjust capacity and production allocation decisions conditional on financial information, the result of which always increases optimal utility. In general, the effect of financial hedging increases with a firm's risk aversion or when there is positive correlation between exchange rates. Operational hedging becomes more useful when the firm is risk-neutral or when there is negative correlation between exchange rates. Finally, the second paper concludes that financial hedging can be used as a substitute for operational hedging. With financial hedging, the risk-averse firm tends to decrease its capacity proportion in China due to its substitution effect.;The first paper studies operational hedging strategy for firms that face both exchange rate and demand uncertainties. Operational hedging comes in the form of real option to switch production between domestic suppliers and offshore outsourcing suppliers. It demonstrates that these firms benefit from maintaining capacities with both suppliers. The value of the operational option increases as the exchange rate uncertainty or demand uncertainty increases. In addition, when firms become risk-averse, they may use domestic capacity as a hedge against offshore capacity. As a result, the firms may choose to sustain local capacity even if it exhibits negative marginal contribution to the profit. Furthermore, risk-averse firms may retain more total capacity than risk-neutral firms.