Question

How can a company use derivatives to manage logistics and supply chain risks?

You may use a sample company to explain

Answer 1

Company can use derivatives to manage logistics and supply chain risk through various specific steps which could be a combination of following-

A. One can be going long or short depending upon the needs that would offset the increased cost of supply chain management network due to fluctuations in macro as well as micro risk

B. The risk of loss on various items due to delay of delivery can also be hedged through derivative market contracts on these commodities.

C. Risk sharing agreements can also be used between suppliers as well as recipients in order to navigate the risks associated with the fluctuation of of money flows so there would be a counterparty risk sharing agreement which is a type of derivatives.

D. it can also hedge warehousing cost when dealing with the electricity charges by going long or short on the electricity companies.

E. Market participants in cold storage space will be hedging their risk of higher expenditure which will be surfacing out of operating companies specific risk factors through derivatives hedging.

F. it can also help itself to enter into forward contract with freight companies in order to decrease the overall risk associated with the delivery.

G. These companies can also be using derivative to offset the decrease in sales revenue resulting out of the decreased rates.

To give an example of a company, I would be taking a cold storage company that is always exposed to risk of warehousing that it would be using derivatives to a great extent in order to minimise fluctuation in his expenditure to maintain a uniform rate of profits.