This study investigates how demand uncertainty reduction (DUR) affects the decisional dynamics within a supply chain, which comprises a supplier and a capital-constrained retailer, who chooses between bank credit and trade credit financing. A comprehensive scenario analysis suggests the retailer should accept trade credit when DUR is high, trade credit risk premium is moderate, and wholesale price is exogenous and low. However, the retailer should adopt trade credit only when both DUR and production cost are not high, and wholesale price is set endogenously. We further relax the assumption on the bank’s risk attitude and find most results still hold.

We study an optimal investment policy of a risky project when there exists the possibility that a firm may permanently exit the business under deeply deteriorated market conditions in the future. To capture the riskiness of the investment return rate, a Geometric Brownian motion is adopted to model the firm's profit stream. Applying the real options framework, this paper aims at characterizing the firm's optimal investment policy of the risky project under permanent exit option. It is shown that the investment threshold is no longer a monotonic function of the market uncertainty. Specifically, the investment threshold can decrease with market uncertainty for moderate uncertainty. And the investment threshold will eventually increase with market uncertainty if the uncertainty becomes sufficiently high. Extensive numerical experiments are conducted to check the robustness of the theoretic results. Some managerial implications are derived for investment decisions under the exit option.

We consider a two-stage supply chain comprising one risk-neutral manufacturer (he) and one risk-averse retailer (she), where the manufacturer procures consumption commodities in spot market as major inputs for production and sells the final products to the retailer. The retailer then sells the final products to the market at a stochastic clearance price. We investigate a flexible price contract that allows the manufacturer to determine the product wholesale price, and the retailer to determine the order quantity, based on the future spot price of consumption commodities. Compared with the simple wholesale price contract, a win-win situation can be achieved under the flexible price contract when the manufacturer's postponed processing cost is lower than a threshold. However, under this flexible price contract the retailer may suffer from the commodity price volatility, even if she does not procure the commodities directly. We further investigate how the risk-averse retailer conducts mean-variance financial hedging by purchasing consumption commodity futures contracts. We formulate the problem using a dynamic programming model and derive a closed-form time-consistent financial hedging policy. Through numerical experiments, we show that the commodity price risk from the manufacturer to the retailer is effectively mitigated with the hedging, and the benefits of the flexible price contract are maintained. (C) 2018 Elsevier B.V. All rights reserved.

We consider a commodity procurement problem where a firm satisfies a future customer demand with uncertainty risk via spot trading and forward sourcing. Although the firm can make demand forecast update and hence, remove demand uncertainty when the selling season arrives, it is still susceptible to a high emergency logistics cost at that time spot. Therefore, in this paper, the tradeoff between the mismatching cost of supply and uncertain demand (highest at the beginning of the planning horizon) and the high at-once delivery cost (highest at the ending of the planning horizon) is investigated. We develop a two-stage model and derive the optimal procurement policy for the firm. We also characterize the optimal parameters by assuming demand follows a bivariate normal distribution. Finally, extensive Monte-Carlo simulation is conducted and we quantify the value of forward contracts and the value of information update, using the crude oil data.

This paper studies the capacity management problem for a firm that uses debt financing. This is done by analyzing the effect of the associated agency problem when making capacity decisions. The agency problem arises when there are potential conflicts of interest between the firm owner and the lender. We show that this agency problem can constrain the firm's optimal capacity decision, because the borrowing rate will increase as the risk of default increases with capacity level chosen. The firm will therefore try to optimally choose the level so as to reduce the risk of bankruptcy, which the lender will take into account, and as a consequence the firm will try to control the risk associated with potentially high borrowing costs. However, even when the expected bankruptcy cost is carefully controlled, the optimal capacity decision is still made at the risk of incurring considerable agency costs. In addition, the corporate tax level can also play a significant role in capacity choice. We show that although a higher tax rate leads to bigger tax benefit of debt and lower agency cost, it also gives rise to a higher tax liability. After balancing the tax benefit of debt with the agency cost, the firm can make an optimal decision on the capacity level required. The efficacy of financial hedging for mitigating the agency cost is also analyzed. Finally, we compare and contrast our analysis with existing studies, and it appears that we have been able to obtain a deeper insight into the problem. (C) 2017 Elsevier B.V. All rights reserved.

 Abstract—This paper aims at addressing the contingent sales price risk mitigation problem of a risk-averse firm which procures some kind of commodity from the spot market as the major input for production. The downstream buyer pays the firm following a contingent payment rule by which the exact amount depends on the input commodity spot price when the product is physically delivered. In order to reduce the volatility originating from the contingent payment, a multi- stage financial hedging strategy using commodity futures contracts is proposed. This approach allows the firm to adjust the position in commodity futures market dynamically. The close-form optimal hedging strategies are presented when the firm adopts the exponential or mean-variance utility to characterize the risk-averse attitude.