Risk transmission in supply chains in the presence of futures trading

This paper tries to build a three-stage game model between a supplier and a manufacturer in a supply chain with a wholesale price contract, so as to describe how the manufacturer and the supplier strategically interact. Further, via analyzing the equilibrium, it studies the impacts of the change in the futures price on the transmission of demand risk (variance) in supply chains (i.e. how the futures price affects node firms´ profit variances and expectations). The results show that (1) in the presence of the futures market, the change in the futures price can be used for supply chain managers as an indicator for foreseeing how their profitability and risk are going to change, (2) the manufacturer´s ordering-decision makes the exogenous demand risk transmit to the supplier, and (3) this transmission results in higher profit risk that the supplier bears when the futures price rises.