Cash Hedging in a Supply Chain


Yixuan Xiao received her bachelor’s degree in theoretical and applied mechanics from Peking University and PhD in Operations and Manufacturing Management from Olin Business School, Washington University in St. Louis. She is currently an assistant professor at City University of Hong Kong, Department of Management Sciences. Her research interests include pharmaceutical supply chain, supply chain risk management, and interface between operations and finance.


We study hedging cash flow risks in a supply chain where firms invest internal funds to improve production efficiencies. We offer a decomposition framework to capture the cost reduction and flexibility effect of hedging. It allows us to understand how a firm's hedging choice depends on its supply chain partner's decision, and how such interaction is affected by supply chain characteristics such as market size, cash flow volatility and correlation. When firms' cash flows are independent of each other, they are more likely to hedge with a larger market size. When cash flows are correlated, the impact of market size and volatility on firms' hedging decisions presents multiple patterns, contingent on whether their risks amplify or offset each other.