Abstract: Considering a two-echelon supply chain consisting of an upstream manufacturer and a downstream retailer where the exchange rate risk and demand risk are pooled at the downstream retailer, two dynamic game models corresponding to whether or not the retailer is stimulated to hedge the exchange rate risk via lowering the wholesale price are established, and the corresponding equilibriums are calculated. With the equilibriums, the results show that (1)the retailer's exchange rate risk-hedging stabilizes the supply chain's production regardless of the wholesale price incentive whereas the wholesale price incentive raises the retailer's hedging proportion of total purchase payment and the wholesale price itself;(2)the wholesale price incentive makes the manufacturer reap higher profit, implying that the manufacturer is willing to incentivize the retailer to hedge the exchange rate risk;(3) under risk pooling, incentivizing the retailer to hedge the exchange rate risk via a lower wholesale price is able to achieve a tradeoff between expected profit and profit variance: the increasing in the exchange rate risk and demand risk reduce the (expected) profitability for both the whole supply chain and individual node firms, and at the same time, lower the profit variance for both the whole supply chain and the node firm where the two risks are pooled.

Key words: supply chain risk management, risk pooling, wholesale price incentive, risk hedging