Supporting Operations with Financial Hedging: Cash Hedging Vs. Cost Hedging in an Automotive Industry

Panos Kouvelis and Danko Turcic

Production and Operations Management, 2021, vol. 30, issue 3, 738-749

Abstract: Financial hedging of raw material prices and exchange rates has become an integral part of many manufacturers' operating practices. Previous empirical research suggests that a desire to avoid financial distress and the affiliated curtailment in operations is one of the strongest hedge motivations. Taking the hedging motivation as given, we examine the effectiveness of two data‐driven hedging policies at mitigating financial distress in the car manufacturing industry. The first policy is the “cost hedging” policy, under which the carmaker hedges raw material and production input purchases. This policy appears to be in wide use in practice. The car manufacturer needs to trade in aluminum, steel, zinc, and plastic to achieve the cost hedge. The second policy is a “cash hedging” policy under which the firm hedges its net cash flow. To determine a cash hedging policy, the firm solves a stochastic program that minimizes its hedge cost subject to cash flow constraints. The program solution suggests that the firm needs to trade S&P500, aluminum, and zinc to implement the hedge. Our results reveal that the most critical drivers of hedging decisions appear to be demand shifts, especially demand elasticity shifts. The least important drivers are car design updates, which change the car's raw material requirements. This finding sheds light on why cost hedging, which focuses on hedging raw materials, is less effective than the cash hedging technique, which hedges both costs and demand.

Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

Downloads: (external link)
https://doi.org/10.1111/poms.13314

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:bla:popmgt:v:30:y:2021:i:3:p:738-749

Ordering information: This journal article can be ordered from
http://onlinelibrary ... 1111/(ISSN)1937-5956

Access Statistics for this article

Production and Operations Management is currently edited by Kalyan Singhal

More articles in Production and Operations Management from Production and Operations Management Society
Bibliographic data for series maintained by Wiley Content Delivery ().