EXCHANGE RATE RISK IN A NEWSVENDOR FRAMEWORK UNDER A GAMMA- DISTRIBUTED EXCHANGE RATE ERROR AND ISOELASTIC DEMAND

Abstract

In a global supply chain consisting of one retailer and one manufacturer, both from specific countries, when there is a time lag between the payments made whilst placing the order and the time when the order is realized, threat in the form of exchange rate fluctuation influences the optimal pricing and order quantity decisions. We explain the effect of exchange rate fluctuation underneath Gamma distribution when the retailer or producer undertakes to share the exchange rate risk and the demand error is modelled in the multiplicative form in the news vendor framework.