Integrated Commodity Inventory Management and Financial Hedging: A Dynamic Mean‐Variance Analysis

We study how to manage commodity risks (price and consumption volume) via physical inventory and financial hedge in a multiperiod problem (with an interperiod utility function) for a risk-averse firm procuring a storable commodity from a spot market at a random price and a long-term supplier at a fixed price. The firm also has access to financial contracts written on the commodity price, such as futures contracts and call and put options. We examine different cases of financial hedging, for example, single-contract and multicontract hedges. For each case, we dynamically maximize the mean-variance utility of the firm's cash flow and characterize an optimal integrated policy of inventory and hedging, which is easy to compute and implement. We find that as long as futures are used in each period, alone or not, the optimal inventory policy is myopic. The optimal hedging policy, however, is never myopic, but depends on all the future optimal decisions. This is contrary to findings of the literature using intraperiod utility functions, which finds myopic hedging to be optimal. Moreover, we find that hedging may lead to inventory reduction in multiperiod problems. Thus the insights from the single-period studies in the literature—hedging leads to inventory increase—do not apply. Finally, insights are offered on the role and impact of inventory and financial hedge on profitability, variance control, and service level, using both analytical and numerical results.

Buy now and price later: Supply contracts with time-consistent mean–variance financial hedging

PurposeDrawing upon underinvestment theory and clientele effect hypothesis, this paper aims to examine the effects of foreign currency (forex) exposure and Shari’ah-compliant status on firms’ financial hedging strategy.Design/methodology/approachBased on data of 250 nonfinancial firms listed on Bursa Malaysia from 2010 to 2018 (2,250 firm-year observations), the authors test the impact of forex exposure based on a vector of foreign-denominated cash flows (FCF) indicators and firms’ Sharīʿah-compliant status on two proxies of financial hedging decisions, namely, the ratio of the notional value of currency derivatives to total assets and a binomial measure of hedging status. The hedging decision models are estimated using panel logistic regression and system generalized method of moments.FindingsThe results indicate significant positive effects of the forex exposure indicators on firms’ propensity to hedge. However, the impact of forex exposure is most prevalent via total FCF. The results also reveal significant positive effects of Sharīʿah-compliant status on firms’ propensity to hedge but its negative impacts on the value of currency derivatives they use. The results suggest that Sharīʿah-compliant firms refrain from engaging in currency derivatives to avoid riba’ and subsequently subdue the clientele effect. However, when the forex exposure reaches higher levels, engagement in currency derivatives becomes a matter of tentative necessity (dharurat).Research limitations/implicationsThis study relies exclusively on the disclosure of foreign currency risk and management data in the annual reports of listed companies. Consequently, this limits the sample size to only those nonfinancial listed companies with complete data for the study period. Also, since none of the companies reports using Sharīʿah-compliant derivatives, the authors thus assume that they use derivative instruments that tolerate “riba.”Practical implicationsGiven the significance of forex exposure on hedging decisions, the accounting profession must strictly adopt FRS 7 and FRS 139 for all listed firms to avoid market scrutiny and sustain their clientele. The results also call for the Islamic market regulators to include mandatory disclosure of conventional currency derivatives in screening firms for clearly prohibited activities to help enhance the credibility of its Islamic financial market.Originality/valueDue to difficulty accessing relevant cash flow data, the study is among the few studies that measure forex exposure using FCF and test more proxy indicators. This study is perhaps the first to examine the Shari’ah perspective on currency derivatives in corporate forex risk management.

This study examines how a firm can mitigate global economic risk through production hedging, defined as producing less than the total demand. We investigate a firm's production planning, pricing, and financial hedging decisions under exchange rate and demand uncertainty with the objective of maximizing expected profit while complying with a value‐at‐risk (VaR) constraint that limits the firm's losses in amount and probability. The study makes three contributions. First, we show that production hedging, when compared to matching demand with production, can substantially reduce risk both from VaR and conditional‐VaR perspectives while increasing expected profit. Our second contribution relates to the optimal pricing decisions. When a firm has pricing flexibility, it is commonly expected that the optimal price would increase under production hedging. Our study, however, shows that production hedging causes the firm to decrease the optimal price below the riskless price in order to benefit from exchange rate fluctuations. The pressure from risk aversion on the optimal price decision is not one directional, and can lead to both an increase and a decrease in price. Third, our work examines the interactions between financial hedging and production hedging. It identifies when financial hedging serves as a complement, and when as a substitute, to production hedging. Our work shows that financial hedging cannot always eliminate production hedging from being an optimal solution.

The research focuses on improving supply chain performance under weather related uncertainties. Weather has a significant impact on the demand for various products in many sectors. Firms dealing in those products often face problems in demand management. Hence, managing supply chains under the weather risk is very important and challenging. To improve the performance of supply chains of weather-sensitive products, the main objective of the research is to design new classes of contract that can outperform the widely used supply chain contracts, such as wholesale, buyback, and revenue sharing contracts, and trade credit contracts. To design those new classes of contract, the research investigates: (1) coordination mechanisms of both risk-neutral and risk-averse supply chain members, (2) implementation of weather rebates based on Cooling Degree Days (CDD)/Heating Degree Days (HDD), which are the underlying assets for the temperature-based weather derivatives traded on the financial market, and (3) investigating how weather rebate and financial hedging strategies can be implemented to improve the supply chain performance. The design of new classes of contract involves three aspects: modeling a firm's objective under risk, modeling the payoff from weather derivatives, and designing the supply chain parameters. A firm's objective under risk is measured by using the Conditional Value at Risk (CVaR) approach. The supply chain parameters are designed such that the contracts coordinate with a Pareto-improving solution for both parties involved in the contract. The study has many contributions. Firstly, it fills the gap of the existing domain of literature on weather risk in supply chains. With an increase in climate variations, weather risk in supply chains is a pertinent issue. Secondly, the designed new classes of contract are beneficial to administer for a wide range of products and perform better compared to the regularly used traditional contracts. The designed contracts are analyzed using actual demand data collected from a large retail company in Canada. Thirdly, with trade credits being one of the most common ways of supply chain financing, the study explains how trade credits with weather rebates and financial hedging can effectively coordinate supply chains under weather risk.

We study the performance of a supply chain where N retailers and a single producer compete in a Cournot-Stackelberg game. We assume the retailers are budget-constrained and their profits depend on the realized path of some tradeable (stochastic) economic index. The supply chain might therefore be more profitable if the retailers were able to reallocate their budgets across different states of nature. In order to affect such a reallocation, we assume the retailers are able to trade dynamically in the financial market. We solve the Cournot-Stackelberg equilibrium when the retailers have identical budgets and study the impact that competition and hedging have on the supply chain and on the various players including the firms themselves, the end consumers and society as a whole. We show, among other things, that when the retailers can hedge there exists an optimal level of competition, N¯, that is often finite and optimal from the perspective of the consumers, the firms and society as a whole. In contrast, when the retailers cannot hedge, these welfare measures are uniformly increasing in N.

Multinational firms will engage in operational hedging only when both exchange rate uncertainty and demand uncertainty are present. Operational hedging is less important for managing short-term exposures, since demand uncertainty is lower in the short term. Operational hedging is also less important for commodity-based firms, which face price but not quantity uncertainty. For firms with plants in both a domestic and foreign location, the foreign currency cash flow generally will not be independent of the exchange rate. Consequently the optimal financial hedging policy cannot be implemented with forward contracts alone but can be implemented using foreign currency call and put options, and forward contracts.

Purpose– The purpose of this paper, and a companion paper (Duxbury, 2015), is to review the insights provided by experimental studies examining financial decisions and market behavior.Design/methodology/approach– Focus is directed on those studies examining explicitly, or with direct implications for, the most robustly identified phenomena or stylized facts observed in behavioral finance. The themes for this first paper are theory and financial markets.Findings– Experiments complement the findings from empirical studies in behavioral finance by avoiding some of the limitations or assumptions implicit in such studies.Originality/value– The authors synthesize the valuable contribution made by experimental studies in extending the knowledge of the functioning of financial markets and the financial behavior of individuals.

Financial markets and products have increasingly become complicated as a result of the influx of financial products hence consumers are now required to make complex financial decisions about their day to day investment decisions, portfolio choice and future financial planning. To make an informed decision, a considerable level of financial literacy and trust is required. Globally, households are encouraged to take a more active approach to personal finance. However, the success depends largely on the level of financial literacy of the individual. Again, global evidence of stock market non-participation puzzle has warranted several studies to ascertain what explains the phenomenon. For this reason, this paper examines the impact of financial literacy and trust on stock market participation and also ascertains if there exists any gender gap in financial literacy and share ownership. Using survey data on a sample of 398 respondents, there was an evidence of low financial literacy levels. The probit regression results show that less financially literate investors are significantly less likely to invest in stocks if socio-demographic characteristics and risk attitudes are accounted for. However, the individual’s subjective level of trust in the stock market has no explanatory effect on the individual’s decision to invest in stocks. Hence, financial literacy partly explains the non-participation puzzle in financial literacy and stock market participation. It is also found that financial literacy is affected by one’s level of education and access to financial information, hence financial literacy programs should be given much attention especially through the use of electronic media.

The purpose of the article/hypothesis. Paper highlights certain crucial aspects of misleading and deceitful advertisings of banking and financial products and services, its effects, and the necessity to ban and/or restrict some of professionals’ misbehaviours. Many research evidence shown how an endless amount of information and specific advertisements can influence consumers’ financial decision-making. This concern was intensified by the impact of COVID-19 on the financial situation of many households. Methodology. Author has conducted extensive research using national and international literature, public reports, legal cases, administrative proceedings, national and international legislations. There are presented some national examples, good principles and suggestions of what should be done to better protect the customers on the banking and financial market. Results of the research. The study revealed that the misleading, abusive conducts and numerous sales strategies of professionals operating on the markets at issue may regard almost any individual. Unethical advertising practices may intensify because of ever-increasing technology and new advertising techniques. As described, both the type and the timing of the advertising can also greatly influence consumers’ choice. The policy makers shall be determined, decisive and fast in order to assure that financial products and services are safe and law-compliant, to raise standards in advertising sector, to prevent defaults, irresponsible borrowing, loss of privacy, discrimination, failures and predatory practices. The measures shall prevent the frauds and the marketing and sales strategies of a set of unrealizable promises or products unsuited to the needs of customers on the financial advertising market.

This chapter discusses the need for financial markets to integrate environmental, social, and corporate governance factors (ESG factors) into decision-making processes. The chapter focuses on the importance of integration of ESG factors and sustainable development with financial decisions. The chapter discusses why enterprises and financial markets should adopt a systemic and long-term vision and to understand the financial significance of ESG factors within the full spectrum of threats and opportunities and identify these issues as the research gap needs to be covered. The chapter is based on a literature review, comparative analysis, and case studies. ESG factors can be material and can increase long-term, sustainable value of companies and financial markets.

The rapid advancements in Artificial Intelligence (AI) and Big Data Analytics have significantly transformed financial markets, enabling more precise, data-driven, and strategic decision-making. This study explores the profound impact of AI-driven analytics in financial decision-making, focusing on how machine learning algorithms, predictive analytics, and automation enhance market efficiency, risk assessment, and investment strategies. The research highlights how AI-powered Big Data Analytics processes vast amounts of structured and unstructured financial data to identify patterns, trends, and anomalies that influence market movements. It further examines how financial institutions leverage AI for fraud detection, sentiment analysis, and algorithmic trading, leading to more informed and efficient investment decisions. Through a survey-based approach, this study collects data from financial professionals, analysts, and investors to evaluate their perspectives on AI’s role in improving data accuracy, reducing uncertainty, and optimizing financial strategies. The findings provide valuable insights into how AI-driven analytics contributes to minimizing risks, enhancing forecasting accuracy, and supporting regulatory compliance in financial markets. The study concludes that the integration of AI in Big Data Analytics is revolutionizing financial decision-making by improving efficiency, reducing human biases, and enabling real-time strategic actions. However, challenges such as data privacy concerns, ethical considerations, and the need for advanced AI governance frameworks remain crucial areas for future exploration. Keywords—Artificial Intelligence, Big Data Analytics, Financial Markets, Strategic Decision-Making, Algorithmic Trading, Risk Assessment, Predictive Analytics.

In today’s fast-paced business environment, integrating sustainability into financial decision-making has been a key driver of change. As stakeholders increasingly demand greater corporate transparency and accountability, regulatory bodies have stepped in to ensure that sustainability reporting is standardized and robust. This paper aims to establish the relationship between the sustainability-related disclosure rules and the dynamic indicators of the financial market. The object of the study is 74 countries of the world, which are grouped into developed and developing countries. The time period is 2021, for the stock market capitalization indicators – 2020, as the most recent years with available data. The research methods are normality tests (Shapiro-Wilk and Shapiro-Francia test), comparison methods (Student’s t-test and Mann-Whitney U test, regression analysis with dummy variables), linear and non-linear correlation and regression analysis (logarithmic, polynomial). The results obtained confirmed that the sustainability-related disclosure rules are higher in developed countries than in developing ones. At the same time, in developed countries, the growth of such requirements affects the increase in stock price volatility, stock market capitalization, foreign direct and portfolio investments. For developing countries, there is also an increase in the stock market capitalization, portfolio investments and the volume of stock trading. Recognizing these trends can benefit both financial market regulators and participants to encourage the formation of a transparent and efficient financial market, thereby mitigating the problems associated with information asymmetry.

Financial Hedging and Product Market Rivalry

Managerial Risk Attitudes and Biases, and Hedging Behaviors in the Financial Markets