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Managing foreign exchange risk with buyer–supplier contracts

  • Latha ShankerEmail author
  • Ahmet Satir
S.I.: Recent Developments in Financial Modeling and Risk Management
  • 4 Downloads

Abstract

We model the optimal choice of the contract terms of a foreign exchange risk sharing supply contract between a buyer and supplier who are located in two different countries, when the supplier quotes a wholesale price in its currency, and both parties are mean variance expected utility maximizers. We extend the model to examine alternatives to the risk sharing contract, which are the wholesale price contract without risk hedging and a wholesale price contract with transfer of risk by the buyer to an options dealer. We empirically apply the model, to two different currencies of the supplier, by assuming that the buyer is based in the U.S., while the supplier is based in one of two countries, which are Switzerland and the U.K. Our results show that the performance of the risk sharing contract provides a substantial improvement in the total expected utility of both partners to the contract, over both the wholesale price contract without risk hedging and the risk transfer contract.

Keywords

Risk sharing supply contract Foreign exchange risk Supply chain risk management 

Notes

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Copyright information

© Springer Science+Business Media, LLC, part of Springer Nature 2019

Authors and Affiliations

  1. 1.John Molson School of Business, Department of FinanceConcordia UniversityMontrealCanada
  2. 2.John Molson School of Business, Department of Supply Chain and Business Technology ManagementConcordia UniversityMontrealCanada

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