The Incorporation of Cross Hedging Diesel Fuel Into a Single Vendor-buyer Supply Chain Model

Many supply chains rely on diesel fuel for transportation and other purposes, and must cope with the risk associated with its price volatility, which can affect firms’ earnings and operating costs. This master’s research project summarises studies in the literature to provide an understanding of this problem, both from risk hedging and supply chain perspectives. We then take steps to further the research by modifying the single vendor-buyer supply chain model in order to incorporate the process of cross hedging; identifying and evaluating potential cross hedging instruments for diesel fuel during differing market conditions; and evaluating the realworld effectiveness of cross hedging in the supply chain model by creating three numerical examples, utilizing real-world price data and the determined cross hedging instrument and hedge ratio, in order to determine whether it is worth it for firms to incorporate this type of cross hedging into their supply chain management strategies.