Mitigating foreign exchange risk exposure with supply chain flexibility: A real option analysis

Abstract

Uncertainty and risk abound in supply chains. One such form of risk existing in global supply chains comes from volatility associated with currency fluctuations—Foreign Exchange (FX) risk. Although the study and practice of using financial hedging instruments are well documented, there are also emerging supply chain strategies firms may adopt for mitigating FX risk. The purpose of this multi-method study is to investigate how supply chain professionals perceive and mitigate FX risk, as well as to measure how investing in supply chain flexibility strategies affect firm financial performance. Using a mixed-method approach based on qualitative case studies and simulation experiments using the lens of Real Option Theory, we are able to show how investments in supply chain flexibility strategies can mitigate FX risk in terms of cash flows and profits. Theoretical, methodological, and managerial implications are provided for better understanding FX risk in the emerging supply chain finance discipline.