ABSTRACT
The outcome of almost any business decision partly depends on risk and uncertainty. Consider for example a European clothing retail chain that during summer places orders for the winter collection from suppliers in Asia. Will the designs appeal to consumer tastes? What designs will the closest competitors choose? How will exchange rate changes affect the cost of goods? Will political uncertainty or strikes affect the functioning of the supply chain? The question that we address in this chapter is how such risks and uncertainties should affect decisions by firms. Should the firm in question use financial instruments such as forward contracts or options to hedge exposures? Should it take higher fixed costs to build flexibility into its operations? Should it use several suppliers of the same good to create alternatives if one supplier fails?
