Abstract
Too many hedging programs target the nominal risks of ‘soiled’ businesses rather than a company’s net economic exposure-aggregated risk across the broad enterprise that also includes the indirect risks. This chapter resolves this problem by integrating the financial hedge, which is typically used to hedge the commodity price risk, and the operational hedge. It dynamically maximizes the total cash flow under mean-variance (MV) criteria to determine time-consistent optimal policies for inventory and financial hedging portfolios. The chapter reviews relevant literature, and introduces all relevant notation and important assumptions for multiperiod model. It formally states the model and provides the optimal inventory and hedging policies for the case of a single hedge being used across all periods. The chapter offers insights on the role and impact of operational and financial hedges on profitability, cash flow variances, and service levels. It outlines two numerical examples of model application and results. Controlled Vocabulary Terms Commodity risk; Inventory management
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