DOI: 10.1287/serv.2026.0107 ISSN: 2164-3962

Cash Hedging under Partial Vertical Ownership: A Mean-Variance Analysis

Pin Zhou, Jingyi Ren, Xianpei Hong, Tingliang Huang

Existing research has separately explored cash hedging and partial vertical ownership (PVO), yet their joint impact on supply chain operations—especially under overlapping external risks and internal ownership structures—remains underexplored. This study investigates how PVO influences a risk-averse supplier’s cash hedging strategies and profitability. We develop a two-tier supply chain model with an upstream supplier and two downstream manufacturers (one holding PVO), using a mean-variance framework and binary hedging strategy (full/no hedging). We reveal a paradox: while vertical ownership seemingly should intensify hedging through risk-sharing, PVO in fact reduces supplier’s hedging likelihood by mitigating standalone risk aversion, thereby raising the threshold. Uniform pricing under PVO raises hedging thresholds more than differentiated pricing, enhancing risk absorption. Higher PVO boosts the partially owned manufacturer’s profits at the supplier’s expense, particularly with low production costs. Increased product substitution diminishes profits for all firms and weakens hedging advantages due to market volatility. Sequential manufacturer decisions lower the supplier’s hedging threshold relative to simultaneous decisions. An increase in the partial hedging ratio leads to an inverse U-shaped pattern in the supplier’s hedging threshold. This study shows that firms must consider PVO when making hedging and pricing plans. Managers should balance risk and market share, and pay attention to how ownership and product similarity affect risk decisions.

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