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Abstract: We examine a risk-averse distributor’s decision in selecting between bottled wine and wine futures under weather and market uncertainty. At the beginning of every summer, a fine wine distributor has to choose between purchasing bottled wine made from the harvest collected two years ago and wine futures of wine still aging in the barrel from the harvest of the previous year. At the end of the summer, after realizing weather and market fluctuations, the distributor can adjust her allocation by trading futures and bottles.
The paper makes three contributions. First, we develop an analytical model in order to determine the optimal selection of bottled wine and wine futures under weather and market uncertainty. Our model is built on an empirical foundation in which the functional forms describing the evolution of futures and bottle prices are derived from comprehensive data associated with the most influential Bordeaux winemakers. Second, we develop structural properties of optimal decisions. We show that a wine distributor should always invest in wine futures because it increases the expected profit in spite of being a riskier asset than bottled wine. We characterize the influence of variation in various uncertainties in the problem. Third, our study empirically demonstrates the financial benefits from using our model for a large distributor. The hypothetical average profit improvement in our numerical analysis is significant, exceeding 21%, and its value becomes higher under risk aversion. The analysis is beneficial for fine wine distributors as it provides insights into how to improve their selection in order to make financially healthier allocations.
Keywords: wine futures, pricing, weather uncertainty, market uncertainty, risk aversion
Authors: M. Hakan Hekimoglu (Rensselaer Polytechnic Institute), Burak Kazaz (Syracuse University), Scott Webster (Arizona State University)
Bio of Burak Kazaz: Burak Kazaz is the Steven Becker Professor of Supply Chain Management, and the Laura J. and L. Douglas Meredith Professor for Teaching Excellence at Syracuse University’s Martin J. Whitman of Management. He is the Executive Director of the first research center established in the field of supply chain management in the US (in 1919), the H.H. Franklin Center for Supply Chain Management at Syracuse University. He also serves as the Whitman Research Fellow at Syracuse University. Dr. Kazaz is presently visiting the University of California Berkeley for his sabbatical.
Dr. Kazaz’s research interests include supply chain risk, supply chain finance, and socially-responsible supply chain operations. His publications can be found in premier journals such as Management Science, Manufacturing & Service Operations Management, Operations Research, and Production and Operations Management. His papers have been the recipient of the best paper awards: The Wickham Skinner Prize (2017), Production and Operations Management Society (2016), INFORMS President’s Pick (2015), and the Decision Sciences Institute (2014). He serves as an Associate Editor for Manufacturing & Service Operations Management, as a Senior Editor for Production and Operations Management, as an Area Editor for IIE Transactions.
Dr. Kazaz also served as a Whitman Teaching Fellow from 2010 to 2012, and is the recipient of the first-ever Whitman School of Management Teaching Innovation Award in 2011. He received his Bachelor’s and Master’s degrees in Industrial Engineering from Middle East Technical University in Turkey, and his Ph.D. from the Krannert Graduate School of Management at Purdue University. Prior to this appointment, he taught at the University of Miami and at Loyola University of Chicago. His teaching experience includes undergraduate, MBA and Executive MBA courses, and Ph.D. seminars on operations management, global supply chain management, and logistics.
Dr. Kazaz also worked at the IBM T. J. Watson Research Center in Yorktown Heights, NY. His work is recognized by IBM, British Petroleum, and Procter & Gamble.