Integrated Hedging Strategies for Exchange Rate and Commodity Price Risks
Published in Major Revision at Management Science, 2025
Coauthors: Panos Kouvelis (Olin Business School, Washington University in St. Louis), Xiaole Wu (Fudan University), Yixuan Xiao.
Status: Major Revision at Management Science. Available on SSRN (DOI: 10.2139/ssrn.5559558).
Abstract
We study a firm’s hedging strategy when facing both exchange rate and commodity price risks, where the firm procures a commodity in the domestic market and sells its product to a foreign market.
In the monopoly setting, the firm’s optimal hedging strategy is shaped by the correlation between the two risks and their relative variances. When the correlation between the exchange rate and the commodity price is non-positive, the firm always hedges neither risk, since the non-positive correlation provides a natural hedge. When the correlation is positive, the firm hedges only the less volatile risk if their volatilities differ significantly; otherwise it again prefers hedging neither risk.
In the duopoly setting, competition drives firms to adopt complementary hedging strategies. For non-positive correlation, one firm hedges both risks while the other firm hedges neither. For positive correlation, in most equilibria one firm hedges the exchange rate risk while the other hedges the commodity price risk.
Presentations
- POMS-China Annual Meeting, 2023
- POMS-China Annual Meeting, 2024
- CSAMSE Annual Meeting, 2024
- CSAMSE Annual Meeting, 2025
- POMS-HK International Conference, 2025
- 2025 Supply Chain Finance & Risk Management Workshop, Olin Business School, Washington University in St. Louis (May 2025)
- ISCOM (International Symposium on Contemporary Operations Management), 2025
- Upcoming: POMS Annual Conference 2026 — Sunday, May 10, 10:20–11:50 AM, Reno, NV (Nevada 11); session: Risk, Signals, and Supply Chain Strategy (Track: Supply Chain Risk & Resilience)
Recommended citation: Bin, Z., Kouvelis, P., Wu, X., & Xiao, Y. (2025). Integrated Hedging Strategies for Exchange Rate and Commodity Price Risks. SSRN Working Paper No. 5559558. Major revision at Management Science.
Download Paper | Download Slides