Real options and risk hedging in a global supply chain

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Recent developments in the global economic environment, including worldwide reductions of trade barriers and regional and multi-country economic zones, have led many Canadian and international companies to start developing their businesses in other countries (such as India, China, and Mexico). In seeking new opportunities abroad, they also face many risks, including uncertain exchange rates, uncertain demands, shorter product life cycles, and variable product prices. For example, fluctuation in foreign exchange rates can create unstable cash flows, and even bankruptcy. The proposed research will employ operations research and financial engineering tools to develop an approach to a global supply chain design that can be used successfully by manufacturing facilities, suppliers, and markets in different countries, while at the same time hedging risks from uncertain demands, stochastic product life cycles, uncertain exchange rates, and variable product prices. Risks can be hedged in two ways: changing operational strategies; and trading financial instruments, so that the company can leverage its resources to yield lower costs and higher revenues. This research will provide effective risk hedging tools and theories, and software for an integrated approach to financial and operational hedging strategies against global risks. The analysis will provide guidelines for practitioners to establish effective global supply chain strategies that will maximize their profits, and will ultimately provide a series of new opportunities and hedging strategies for their new risks. With the increasing importance of the global supply chain, this study will play a critical role for successful Canadian businesses, increasing their profit gain and while reducing their downside risk.