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Buyer-Supplier Currency Exchange Rate Flexibility Contracts in Global Supply Chains

Ogunranti, G., Ceryan, O. ORCID: 0000-0002-7298-9781 and Banerjee, A. ORCID: 0000-0001-8961-7223 (2020). Buyer-Supplier Currency Exchange Rate Flexibility Contracts in Global Supply Chains. European Journal of Operational Research, doi: 10.1016/j.ejor.2020.05.053


This paper analyzes a decentralized global supply chain under a newsvendor setting, where a supplier delivers a certain quantity of a single product to a buyer in accordance with the terms of a mutually agreed upon contract. This contract is signed prior to the delivery of the product and subsequent payment, thus, exposing the supply chain to the risk of currency exchange rate fluctuations. We propose two types of currency exchange rate flexibility contracts to explore the characteristics of exchange rate risk mitigation policies for the buyer and the supplier. Furthermore, we investigate the effects of the contract structures on the optimal order quantity, as well as the expected profits of both supply chain members. Our results show that the optimal order quantity of the buyer decreases when the wholesale price is uncertain due to exchange rate volatility. Also, both our proposed contracts tend to improve the expected profits of both the buyer and the supplier, when the payment is made in the supplier’s currency, indicating the desirability of adopting such contractual agreements from the perspective of both parties. On the other hand, when the payment is made in the buyer’s currency, our suggested contracts do not yield such win-win scenarios. Finally, we examine the effectiveness of availing the services of a local vendor, which is capable of satisfying any demand in excess of the quantity ordered from the foreign source with short notice, in order to mitigate the risks associated with an overseas order.

Publication Type: Article
Additional Information: © 2020. This manuscript version is made available under the CC-BY-NC-ND 4.0 license
Publisher Keywords: Supply Chain Management, Currency Exchange Rate, Contracts, Newsvendor Model, Risk Sharing
Subjects: H Social Sciences > HD Industries. Land use. Labor > HD28 Management. Industrial Management
H Social Sciences > HG Finance
Departments: Business School > Management
Date Deposited: 10 Jun 2020 10:48
[img] Text - Accepted Version
This document is not freely accessible until 31 May 2022 due to copyright restrictions.
Available under License Creative Commons Attribution Non-commercial No Derivatives.

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