Foreign exchange transaction exposure in a newsvendor setting

In the global supply chain where there is a time lag between arrival of the shipment and the sale, the purchase price to the buyer may, on the day of settlement be different from that on the day of the order if the buyer is to pay in the supplier’s currency. Either the supplier or the buyer is exposed to the loss due to exchange rate fluctuations. The key questions that arise then are: Does it matter who bears the risk? What aspect of exchange rate fluctuation affects the decisions of the supply chain partners? In this note related to Transaction Exposure, we show that in a classical newsvendor setting where the supplier has full information, the optimal policies are independent of which one of the two bears the risk. Numerical examples are presented to highlight model. This paper provides good scenarios in the case of risk management for manufacturer and retailer.