Annals of Operations Research

, Volume 264, Issue 1–2, pp 391–407 | Cite as

Financial hedging and competitive strategy for value-maximizing firms under quantity competition

  • Jian Ni
  • Lap Keung Chu
  • Shoude Li
Original Paper


Inspired by the growing use of financial hedging among competitive firms nowadays, we develop a game-theoretical model to investigate the problem of applying financial hedging to improve a firm’s competitive strategy. A distinctive setting of the model is that the firm value is a concave function of the firm profit, which is consistent with the empirical evidences in finance literature. After proving the unique existence of the Nash equilibrium, we examine the effects of financial hedging on the equilibrium and yield some novel results. In particular, our analysis suggests that in a competitive market, financial hedging is not just to protect a firm’s bottom line; perhaps more importantly, effective financial hedging schemes can help increase the firm value by boosting the firm’s production, raising the market share, and improving its profitability.


Financial hedging Risk management Games theory Nash equilibrium 



The authors would like to thank the Editor and the anonymous referee for their insightful comments. We also gratefully acknowledge support from the National Natural Science Foundation of China (NSFC Nos. 71601159, 71673275).

Compliance with ethical standards

Ethical standard

The authors have read the section on “ethical responsibilities of authors” and decided that we have complied fully with the requirements of the COPE. We also confirm that (1) The authors are full-time employees of their respective academic institutions. They received on other research funding from internal or external funding bodies for this research. (2) This research involves no human participants or the use of live animals.


  1. Askar, S. S. (2014a). On Cournot–Bertrand competition with differentiated products. Annals of Operations Research, 223, 81–93.CrossRefGoogle Scholar
  2. Askar, S. S. (2014b). The impact of cost uncertainty on Cournot oligopoly game with concave demand function. Applied Mathematics and Computation, 232, 144–149.CrossRefGoogle Scholar
  3. Askar, S. S., Ahmed, E., & Elettreby, M. F. (2016). Cournot duopoly model under uncertainty. Nonlinear Science Letters A, 7(1), 13–25.Google Scholar
  4. Athey, S. (2002). Monotone comparative statics under uncertainty. The Quarterly Journal of Economics, 117(1), 187–223.CrossRefGoogle Scholar
  5. Bandaly, D., Satir, A., & Shanker, L. (2014). Integrated supply chain risk management via operational methods and financial instruments. International Journal of Production Research, 52(7), 2007–2025.CrossRefGoogle Scholar
  6. Birge, J. R. (2014). OM forum: Operations and finance interactions. Manufacturing and Service Operations Management,.
  7. Brealey, R. A., Myers, S. C., & Allen, F. (2008). Principles of Corporate Finance (9th ed.). New York: McGraw-Hill/Irwin.Google Scholar
  8. Brown, G. W., & Toft, K. B. (2002). How firms should hedge. Review of Financial Studies, 15(4), 1283–1324.CrossRefGoogle Scholar
  9. Caldentey, R., & Haugh, M. B. (2006). Optimal control and hedging of operations in the presence of financial markets. Mathematics of Operations Research, 31(2), 285–304.CrossRefGoogle Scholar
  10. Caldentey, R., & Haugh, M. B. (2009). Supply contracts with financial hedging. Operations Research, 57(1), 47–65.CrossRefGoogle Scholar
  11. Campello, M., Lin, C., Ma, Y., & Zou, H. (2011). The real and financial implications of corporate hedging. Journal of Finance, 66, 1615–1647.CrossRefGoogle Scholar
  12. Chen, X., Sim, M., Simchi-Levi, D., & Sun, P. (2007). Risk aversion in inventory management. Operations Research, 55(5), 828–842.CrossRefGoogle Scholar
  13. Chen, F. Y., & Yano, C. A. (2010). Improving supply chain performance and managing risk under weather-related demand uncertainty. Management Science, 56(8), 1380–1397.CrossRefGoogle Scholar
  14. Chod, J., Rudi, N., & Van Mieghem, J. A. (2010). Operational flexibility and financial hedging: Complements or substitute? Management Science, 56(6), 1030–1045.CrossRefGoogle Scholar
  15. Demirag, O. C. (2013). Performance of weather-conditional rebates under different risk preferences. Omega, 41, 1053–1067.CrossRefGoogle Scholar
  16. Ding, Q., Dong, L., & Kouvelis, P. (2007). On the integration of production and financial hedging decisions in global markets. Operations Research, 55(3), 470–489.CrossRefGoogle Scholar
  17. Duffie, D. (2001). Dynamic Asset Pricing Theory (3rd ed.). Princeton, NJ, USA: Princeton University Press.Google Scholar
  18. Facchinei, F., & Kanzow, C. (2010). Generalized Nash Equilibrium problems. Annals of Operations Research, 175, 177–211.CrossRefGoogle Scholar
  19. Froot, K., Scharfstein, D. S., & Stein, J. C. (1993). Risk management: Coordinating corporate investment and financing policies. Journal of Finance, 48, 1629–1658.CrossRefGoogle Scholar
  20. Gaur, V., & Seshadri, S. (2005). Hedging inventory risk through market instruments. Manufacturing and Service Operations Management, 7(2), 103–120.CrossRefGoogle Scholar
  21. Graham, J. R., & Rogers, D. A. (2002). Do firms hedge in response to tax incentives? Journal of Finance, 57, 815–839.CrossRefGoogle Scholar
  22. Graham, J. R., & Smith, C. W. (1999). Tax incentives to hedge. Journal of Finance, 54, 2241–2262.CrossRefGoogle Scholar
  23. Holt, C. A., & Laury, S. K. (2002). Risk aversion and incentive effects. American Economic Review, 92(5), 1644–1655.CrossRefGoogle Scholar
  24. Hung, Y. H., Li, L. Y. O., & Cheng, T. C. E. (2013). Transfer of newsvendor inventory and supply risks to sub-industry and the public by financial instruments. International Journal of Production Economics, 143, 567–573.CrossRefGoogle Scholar
  25. Li, R., & Ding, D. (2012). Managing storable commodity risks: Role of inventories and financial hedges. In P. Kouvelis, L. Dong, O. Boyabatli, & R. Li (Eds.), Handbook of Integrated Risk Management in Global Supply Chains. Hoboken, NJ, USA: Wiley.Google Scholar
  26. Ni, J., Chu, L. K., Wu, F., Sculli, D., & Shi, Y. (2012). A multi-stage financial hedging approach for the procurement of manufacturing materials. European Journal of Operational Research, 221, 424–431.CrossRefGoogle Scholar
  27. Okyay, H. K., Karaesmen, F., & Özekici, S. (2014). Hedging demand and supply risks in the newsvendor model. OR Spectrum,. Scholar
  28. Rabin, M. (2000). Risk aversion and expected utility theory: A calibration theorem. Econometrica, 68, 1281–1292.CrossRefGoogle Scholar
  29. Regnier, E. (2008). Doing something about the weather. Omega, 36, 22–32.CrossRefGoogle Scholar
  30. Rountree, B., Weston, J. P., & Allayannis, G. (2008). Do investors value smooth performance? Journal of Financial Economics, 90, 237–251.CrossRefGoogle Scholar
  31. Sayin, F., Karaesmen, F., & Özekici, S. (2014). Newsvendor model with random supply and financial hedging: Utility-based approach. International Journal of Production Economics, 154, 178–189.CrossRefGoogle Scholar
  32. Shaked, M., & Shanthikumar, J. G. (2007). Stochastic Orders. New York, NY, USA: Springer.CrossRefGoogle Scholar
  33. Smith, C. W., & Stulz, R. M. (1985). The determinants of firms’ hedging policies. Journal of Financial and Quantitative Analysis, 20(4), 391–405.CrossRefGoogle Scholar
  34. Sun, Y., Wissel, J., & Jackson, P. L. (2013). Separation results for multi-product inventory hedging problems. Annals of Operations Research,. Scholar
  35. Tekin, M., & Özekici, S. (2014). Mean–Variance Newsvendor Model with Random Supply and Financial Hedging. IIE Transactions,.
  36. Van Mieghem, J. A. (2003). Capacity management, investment, and hedging: Review and recent developments. Manufacturing and Service Operations Management, 5(4), 269–302.CrossRefGoogle Scholar
  37. Wiggins, J., Blas, J. (2008). Food and consumer groups get hedge smart. Financial Times, August 17, 2008.Google Scholar

Copyright information

© Springer Science+Business Media, LLC 2017

Authors and Affiliations

  1. 1.School of FinanceSouthwestern University of Finance and EconomicsChengduPeople’s Republic of China
  2. 2.Department of Industrial and Manufacturing Systems EngineeringUniversity of Hong KongHong Kong SARPeople’s Republic of China
  3. 3.Antai College of Economics and ManagementShanghai Jiao Tong UniversityShanghaiPeople’s Republic of China

Personalised recommendations