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Hedging Inventory Risk Through Market Instruments
Manufacturing & Service Operations Management
We address the problem of hedging inventory risk for a short lifecycle or seasonal item when its demand is correlated with the price of a financial asset. We show how to construct optimal hedging transactions that minimize the variance of profit and increase the expected utility for a risk-averse decision-maker. We show that for a wide range of hedging strategies and utility functions, a risk-averse decision-maker orders more inventory when he/she hedges the inventory risk. Our results aredoi:10.1287/msom.1040.0061 fatcat:khb7q7ts45c4fgl23dulyapfqu