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Conference Paper: Commodity procurement risk management with futures contracts: a dynamic stack-and-roll approach

TitleCommodity procurement risk management with futures contracts: a dynamic stack-and-roll approach
Authors
KeywordsDynamic stack-and-roll approach
Commodity procurement
Risk mitigation
Hedge
Issue Date2012
Citation
The Joint Conference of the 6th International Conference on Operations and Supply Chain Management (ICOSCM) and 9th International Conference on Supply Chain Management and Information Systems (SCMIS), Xi'an, China, 14-18 July 2012. In Conference Proceedings, 2012, p. 142-147 How to Cite?
AbstractProcuring material from commodity spot markets can flexibly fulfil a forward production demand, but increase the risk of high procurement cost due to spot price volatility. In this paper, a dynamic stack-and-roll hedging approach using futures contracts is proposed. The approach aims at mitigating the procurement cost risk and optimising the terminal revenue received from the procurement and hedging activities. It separates the procurement planning horizon into multiple stages, along with varying hedging positions in the nearby futures contracts. Hedging positions are adjusted in response to commodity price behaviour and contemporary perceived information about forward production demand. Guided by the mean-variance criteria over the terminal revenue, dynamic programming is applied to derive a closed-form solution for optimal hedging positions in a discrete-time Markovian setting. Numerical experiments are carried out to assess the proposed approach with explicit solution in a realistic stochastic environment. The price processes are modelled by a fractal nonlinear regression model using real price data of China’s commodity market, while demand information process is modelled by Bayesian formula. The results show that the proposed approach outperforms naive hedging strategy, and effectively mitigates the procurement cost risk.
Persistent Identifierhttp://hdl.handle.net/10722/160278

 

DC FieldValueLanguage
dc.contributor.authorShi, Len_US
dc.contributor.authorChu, LKen_US
dc.contributor.authorWu, Fen_US
dc.contributor.authorSculli, Den_US
dc.date.accessioned2012-08-16T06:07:04Z-
dc.date.available2012-08-16T06:07:04Z-
dc.date.issued2012en_US
dc.identifier.citationThe Joint Conference of the 6th International Conference on Operations and Supply Chain Management (ICOSCM) and 9th International Conference on Supply Chain Management and Information Systems (SCMIS), Xi'an, China, 14-18 July 2012. In Conference Proceedings, 2012, p. 142-147en_US
dc.identifier.urihttp://hdl.handle.net/10722/160278-
dc.description.abstractProcuring material from commodity spot markets can flexibly fulfil a forward production demand, but increase the risk of high procurement cost due to spot price volatility. In this paper, a dynamic stack-and-roll hedging approach using futures contracts is proposed. The approach aims at mitigating the procurement cost risk and optimising the terminal revenue received from the procurement and hedging activities. It separates the procurement planning horizon into multiple stages, along with varying hedging positions in the nearby futures contracts. Hedging positions are adjusted in response to commodity price behaviour and contemporary perceived information about forward production demand. Guided by the mean-variance criteria over the terminal revenue, dynamic programming is applied to derive a closed-form solution for optimal hedging positions in a discrete-time Markovian setting. Numerical experiments are carried out to assess the proposed approach with explicit solution in a realistic stochastic environment. The price processes are modelled by a fractal nonlinear regression model using real price data of China’s commodity market, while demand information process is modelled by Bayesian formula. The results show that the proposed approach outperforms naive hedging strategy, and effectively mitigates the procurement cost risk.-
dc.languageengen_US
dc.relation.ispartofJoint Conference of the 6th ICOSCM and 9th SCMIS International Conferenceen_US
dc.rightsCreative Commons: Attribution 3.0 Hong Kong License-
dc.subjectDynamic stack-and-roll approach-
dc.subjectCommodity procurement-
dc.subjectRisk mitigation-
dc.subjectHedge-
dc.titleCommodity procurement risk management with futures contracts: a dynamic stack-and-roll approachen_US
dc.typeConference_Paperen_US
dc.identifier.emailChu, LK: lkchu@hkucc.hku.hken_US
dc.identifier.emailSculli, D: hreidsc@hkucc.hku.hken_US
dc.identifier.authorityChu, LK=rp00113en_US
dc.description.naturepostprint-
dc.identifier.hkuros203750en_US
dc.identifier.spage142en_US
dc.identifier.epage147en_US

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