Weather Derivatives Structuring and Pricing: Evidence from an Agricultural Sustainable Aid in Africa

AbstractWeather derivatives are a relatively new form of financial security that can provide firms with the ability to hedge against the impact of weather related risks to their activities. Participants in the energy industry have employed standardized weather contracts trading on organized exchanges since 1999 and the interest in non-standardized contracts for specialized weather related risks is growing at an increasing rate. The purpose of this paper is to examine the potential use of weather derivatives to hedge against temperature related risks in Canadian ice wine production. Specifically we examine historical data for the Niagara region of the province of Ontario, Canada, the largest icewine producing region of the world, to determine an appropriate underlying variable for the design of an option contact that could be employed by icewine producers. Employing monte carlo simulation we derive a range of benchmark option values based upon varying assumptions regarding the stochastic process for an underlying temperature variable. The results show that such option contracts can provide valuable hedging opportunities for producers, given the historical seasonal temperature variations in the region. (JEL Classification: G13, G32, Q14, Q51, Q54)

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Hot or Cold? A Comparison of Different Approaches to the Pricing of Weather Derivatives

Journal of Emerging Market Finance ◽

10.1177/097265270500400201 ◽

2005 ◽

Vol 4 (2) ◽

pp. 101-133 ◽

Cited By ~ 17

Author(s):

Teddy Oetomo ◽

Max Stevenson

Keyword(s):

Weather Derivatives

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A Methodical Approach to Design and Valuation of Weather Derivatives in Agriculture

Advances in Meteorology ◽

10.1155/2013/146036 ◽

2013 ◽

Vol 2013 ◽

pp. 1-8 ◽

Cited By ~ 7

Author(s):

Jindrich Spicka ◽

Jiri Hnilica

Keyword(s):

Risk Management ◽

Low Income ◽

Crop Yields ◽

Option Price ◽

Interdisciplinary Approach ◽

Weather Conditions ◽

Low Income Countries ◽

Management Tool ◽

Weather Derivatives ◽

Methodical Approach

The paper deals with weather derivatives as the potentially effective risk management tool for agricultural enterprises seeking to mitigate their income exposure to variations in weather conditions. Design and valuation of the weather derivatives is an interdisciplinary approach covering agrometeorology, statistics, mathematical modeling, and financial and risk management. This paper first offers an overview of data sources and then methods of design and valuation of weather derivatives at the regional level. The accompanied case study focuses on cultivation of cereals (wheat and barley) in the Czech Republic. However, its generalizability is straightforward. The analysis of key growing phases of cereals is based on regression analysis using weather indices as the independent variables and crop yields as dependent variables. With the bootstrap tool, the burn analysis is considered as useful tool for estimating uncertainty about the payoff, option price, and statistics of probability distribution of revenues. The results show that the spatial and production basis risks reduce the efficiency of the weather derivatives. Finally, the potential for expansion of weather derivatives remains in the low income countries of Africa and Asia with systemic weather risk.

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