THE MARTINGALE APPROACH TO OPERATIONAL AND FINANCIAL HEDGING

This FONDECYT Proposal outlines a set of research goals that I plan to pursue over the next three years. The central topic of the proposed research is to study the interplay between operational and financial risk management decisions in corporations that operate in global and ever more complex market environments.

The research objective of this project is to develop a coherent theoretical framework to integrate operations and risk management decisions in a corporation that trades in the financial markets. The corporation must simultaneously choose an optimal operating policy and an optimal trading strategy in the financial markets. The goal then is to describe a method by which operations and hedging could be conducted and effectively integrated. Specifically, I will propose a general framework for modelling the operations of a manufacturing or service corporation that also trades in the financial markets for hedging purposes. I propose to address this objective by jointly modelling various operating and financial environments, using techniques and models from operations, supply chain management, stochastic control and mathematical finance.

Through this project, I hope to get some answers to the following fundamental questions: How do manufacturing and service corporations integrate operations and risk management decisions? What is an adequate framework to model this problem taking into account the different risk preferences of shareholders and managers? How does operational uncertainty affect financial hedging techniques? How do large companies affect market conditions (like spot price fluctuation) and what is the effect on operational and risk management strategies? In the process of answering these questions, I will also develop and improve related mathematical models and techniques.

The impact of this research proposal and educational activities are: (1) to narrow the gap between industry practices and academic research by effectively integrating current practices into the models and solution techniques that I plan to develop; (2) to develop course materials available to a wide audience through my website; (3) to disseminate research and current state-of-the-art to the academic community and industry; (4) to promote international collaboration between the Department of Industrial Engineering at the University of Chile and other research centers in Chile and abroad.