Mean-Variance Newsvendor Model with Random Supply and Financial Hedging

Tekin, Mustafa; Özekıcı, Süleyman

doi:10.1080/0740817x.2014.981322

Cited by 30 publications

(15 citation statements)

References 42 publications

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“…An utility approach requires assessing the utility function of decision makers and it is essentially a difficult task. On the other hand, the meanvariance (MV) approach requires only the mean and the variance of the profit to determine the objective function and thus is easily implementable and applicable (Tekin andÖzekici 2015). The MV approach trades off between the high return in term of mean and the low risk in term of variance.…”

Section: The Mean-variance Approachmentioning

confidence: 99%

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Production Decision Analysis Under Exchange Rate Demand, And Carbon Prices Uncertainties

Prasad¹

2021

Preprint

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This thesis presents an optimal production decision analysis for a multinational firm under exchange rate, carbon allowance prices, and demand uncertainties. Firms having production and sales in two different countries experience both demand and exchange rate uncertainties. When exchange rates move unfavorably, multinational firms face financial losses because of falling profits. Demand uncertainties may result in underage cost when production quantities are less than the demand, or overage cost when production quantities are more than the demand. Additionally, recent environmental regulations on emissions of green house gases, particularly carbon dioxide emissions, also pose risk on firms’s profitability. It is thus important for a risk-averse manager to decide how to mitigate these uncertainties to protect the firm’s financial losses. In order to address these issues, mathematical models that capture firm’s production allocation problem under different scenarios of exchange rate, carbon emissions, and demand uncertainties have been developed. The risk attitude of the firm manager is assumed to be risk averse and is modeled by a mean-variance (MV) utility function. In order to hedge downside risk of exchange rates and upside risk of carbon allowance prices, the firm takes long positions in currency put and carbon call options, respectively. The objective is to maximize the MV function of the firm subject to various capacity and demand constraints and determine the optimal number of currency put and carbon call options. The firm possesses real options capability in the form of capacity flexibility represented by a vector of discrete capacity levels to meet uncertainties of demand. Demand uncertainties are assumed to follow regime-switching behaviors – considering both onestate and two-state probability distributions. The stochastic behavior of exchange rate is modeled by a geometric Brownian motion and its limiting case as a random walk. Functioning under a cap-and-trade emission trading scheme, the firm is obliged to buy carbon allowances for its carbon emissions. Carbon allowance prices are modeled as both geometric Brownian motion and geometric Brownian motion with jump processes. Results demonstrate that integration of real options and financial options increases the utility of the firm, while financial options reduce the variance of the profit.

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Section: The Mean-variance Approachmentioning

confidence: 99%

“…A complete arbitrage-free market under some risk-neutral probability measure is also imposed according to the justifications and approaches used in Tekin andÖzekici (2015) and Chen and Parlar (2007). Therefore, E[max(K et − e t , 0) − P t−1 exp(rh)] = 0 and we obtain,…”

Section: The Optimal Number Of Optionsmentioning

confidence: 99%

Production Decision Analysis Under Exchange Rate Demand, And Carbon Prices Uncertainties

Prasad¹

2021

Preprint

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“…, Rubio‐Herrero et al , Secomandi et al. , Tekin and Özekici ). For example, if we explore the newsvendor problem with the objective of minimizing the variance of the profit (as a measure for “profit risk”), subject to a constraint that the expected profit (as a measure of “profit”) is no less than a specified achievable threshold, the formulation allows us to find a unique ordering quantity solution for the problem.…”

Section: Introductionmentioning

confidence: 99%

Supply Chains Involving a Mean‐Variance‐Skewness‐Kurtosis Newsvendor: Analysis and Coordination

Zhang

Sethi

Choi

et al. 2020

Production and Operations Management

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The classical newsvendor problem seeks to minimize the expected inventory cost or maximize the expected profit. But optimizing an expected value alone does not fully capture the stochastic nature of the newsvendor problem. Inspired by the higher‐moment analyses explored in finance literature, we conduct a mean‐variance‐skewness‐kurtosis (MVSK) analysis for the newsvendor problem. We first derive the analytical expressions for the profit’s mean, variance, skewness, and kurtosis in the standard newsvendor setting, and reveal their structural properties. We then establish various MVSK optimization problems and find the solution to each of them. We show that kurtosis aversion always induces the newsvendor to order less, while skewness seeking can induce the newsvendor to order either more or less depending on the specific structure of the profit’s skewness, which is affected by the symmetric and asymmetric properties of the demand distribution. Finally, based on the Pareto‐optimality concept, we address the challenge of supply chain coordination (SCC) in the presence of MVSK agents in two specific cases: (i) each agent maximizes its MVSK‐objective‐function and (ii) each agent maximizes its expected profit function, subject to given constraints on the profit’s variance, skewness, and kurtosis. In each case, we explore whether and how the supply chain can be coordinated. We find that considering the MVSK preferences of supply chain agents will affect the achievability of SCC and flexibility of the coordinating contract. We also uncover that if we assume an individual MVSK agent to be an MV one, the achievability of SCC by contracts will be very much negatively affected.

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“…Sainathan and Groenevelt [9] abled to analyze a supply chain with various assumptions like buyback and discount by using the NVM. Tekin and Özekici [10] dealt with a case in which there is risk in both demand and supply by using mean variance framework in the NVM. Pal et al [11] studied a special NVM with unknown distribution function of demand, where just the mean and variance of the distribution of demand are known.…”

Section: Introductionmentioning

confidence: 99%

A two-echelon newsvendor problem with limited budget and capacity

Yazdi

Pasandideh

2020

Scientia Iranica

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In this paper, two-echelon newsvendor problem is considered. Many real-life situations like fashion, food industries, and healthcare services match newsvendor problem. Our problem is determining levels of inventory in order to optimize the profit and service level in selling a product. This product is made up of several raw materials. Only the distribution of demand is known, and the hot season of selling the product is just a short period and after that, the price of the product drops dramatically. The storage space and initial budget are limited. We modeled and solved the problem as an unconstrained nonlinear optimization problem using two nonlinear techniques, the sequential unconstrained minimization technique (SUMT) and steepest descent (SD).

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Mean-Variance Newsvendor Model with Random Supply and Financial Hedging

Cited by 30 publications

References 42 publications

Production Decision Analysis Under Exchange Rate Demand, And Carbon Prices Uncertainties

Production Decision Analysis Under Exchange Rate Demand, And Carbon Prices Uncertainties

Supply Chains Involving a Mean‐Variance‐Skewness‐Kurtosis Newsvendor: Analysis and Coordination

A two-echelon newsvendor problem with limited budget and capacity

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