Supply portfolio risk

A manufacturer procuring raw materials via a portfolio of fixed-price long-term contracts is exposed to supply and demand side risks. The single period framework developed focuses on the risks arising from demand uncertainty and intentional contract breach by suppliers. It assumes the presence of a spot market that can be effectively used to mitigate the impact of both risks. The event (and probability) of contract breach is determined endogenously via the spot market price evolution. The buyer copes with the supplier breach or with shortfall/excess in demand by trading in the spot market. The extension to portfolio context is based on the CreditRisk+ framework which is well known in finance literature.