How Does Finance Enhance Operations?

This thesis studies the newsvendor problem under three progressively richer frameworks: risk-neutral, risk-averse, and financially hedged. Under risk neutrality, the optimal order quantity is determined by the classical critical fractile. Introducing risk aversion via a mean-variance objective yields a strictly lower optimal order, with conservatism increasing monotonically in the risk aversion parameter. The central contribution is a characterization of when financial hedging, through a traded asset correlated with demand, recovers this conservatism. We show that comonotonicity of demand and the underlying asset, combined with an appropriately structured hedge payoff, is sufficient to raise the optimal order above the risk-averse benchmark, and derive explicit conditions under which it may also exceed the risk-neutral optimum. Results are illustrated with uniform and exponential demand examples.