Transferring and sharing exchange-rate risk in a risk-averse supply chain of a multinational firm

•We consider currency risk management in a supply chain of a multinational firm with risk transfer and risk sharing contracts.•We study and compare the impacts of risk transfer and risk sharing contracts on utilities of supply chain members.•We identify conditions under which all members are benefited from implementing such risk management contracts.•We conduct sensitivity analysis with respect to transfer price and the location of the headquarter.•We find that using the two contracts jointly may not necessarily result in better utilities of all divisions.

This paper analyzes risk management contracts used to handle currency risk in a decentralized supply chain that consists of risk-averse divisions in a multinational firm. Particular contracts of interest involve transferring risk to a third party by using risk-transfer contracts such as currency options and re-arranging risk between supply chain members using risk-sharing contracts. Due to decentralization, operational and risk management decisions are made locally; however, a headquarter who is interested in total supply chain profit has some controllability over those activities. We question if each kind of risk management contract can improve the utility of all supply chain members compared to the utility without any of those, and how the conditions to achieve such improvements are different. Further structural differences are investigated via sensitivity analysis with respect to the transfer price, the variability of exchange rates, and the location of the headquarter. We also find that using the two kinds of contracts jointly does not necessarily result in better outcomes.