“Financial Hedging and Optimal Procurement Policies under Correlated Price and Demand” by Fehmi Tanrısever, Faculty of Business Administration, Bilkent University
Friday, November 20 1:40 p.m.
EA-409, Bilkent University
Abstract:
We consider a firm that procures an input commodity to produce an output commodity to sell to the end retailer. The retailer’s demand for the output commodity is negatively correlated with the price of the output commodity. The firm can sell the output commodity to the retailer either through a spot contract or forward contract. Input and output commodity prices are also correlated and follow a joint stochastic price process. The firm maximizes shareholder value by jointly determining optimal procurement and hedging policies.We show that partial hedging dominates both perfect hedging and no-hedging when input price, output price, and demand are correlated. We characterize the optimal financial hedging and inventory policies as a function of the term structure of the commodity prices, the correlation between the input and output prices, and the firm’s operating characteristics. In addition, our analysis illustrates that hedging is most beneficial when output price volatility is high and input price volatility is low. Our model is empirically tested on futures price data for corn and ethanol from the Chicago Mercantile Exchange between 4/1/2005 and 12/31/2011. This is a joint work with Ankur Goel. Bio: Fehmi Tanrisever received his Bachelor of Science degree in Industrial Engineering from Bilkent University, Ankara, Turkey in 2002.
After graduation, he joined the Operations Research and Industrial Engineering program at the University of Texas at Austin and received his Master of Science degree in Operations Research and Industrial Engineering in 2004. Subsequently, he entered the PhD program in Supply Chain and Operations Management at the McCombs School of Business and received his PhD in 2009. After receiving his PhD, he worked as an assistant professor of Operations Management and Finance at the Industrial Engineering and Innovation Sciences Department at Eindhoven University of Technology until 2013. Since September 2013, he is an assistant professor of Operations Management at Bilkent University, Ankara, Turkey. His publications have appeared in journals including Production and Operations Management, Annals of Operations Research, European Journal of Operational Research and Energy.