Production Planning with Risk Hedging Under a Conditional Value at Risk Objective

Abstract

Effective management of demand risk is a central problem of production planning. In many applications, it is observed that demand often depends on certain asset prices in the financial market. This calls for a model that jointly optimizes the production decision along with a risk hedging policy, using the latter to compensate for loss of profit in scenarios of weak demand. In “Production Planning with Risk Hedging under a Conditional Value at Risk Objective,” Wang and Yao develop an integrated production and risk hedging model, where the risk hedging strategy is derived in explicit form and the production quantity is solved as a concave maximization problem. Furthermore, a complete characterization of the efficient frontier is provided, and the improvement over the production-only decision is quantified.