Purpose – The use of weather derivatives is impaired with a basis risk which diminishes the hedging effectiveness and hinders the distribution of these risk management instruments in the agricultural sector. A frequently suggested approach to reduce the basis risk is the use of mixed indices...

Recent and presumable future developments tend to increase the risks associated with farming activities. These include climate risks, which have always played an important role in farming. Weather-based instruments can be valuable tools to reduce the risk associated with unfavourable climate...

This paper illustrates how weather derivatives indexed to forecasts of famine can be designed and used by operational agencies and donors to facilitate timely and reliable financing, for effective emergency response to climate-based, slow-onset disasters such as drought. We provide a general...

This paper outlines approaches to valuating weather-linked bonds, mortgages, and operating lines of credit. Using historical data from weather stations in Adrmore, Oklahoma, and Ithaca, New York, indemnities and insurance premiums are computed for specific-event rainfall insurance. The main...

Basis risk – the risk that payoffs of a hedging instrument do not correspond to the underlying exposures – is cited as a primary concern for implementing weather data, we investigate several dimensions of weather basis risk in the U.S. corn market. Results suggest that while geographic basis...

Since the mid-1990s, agricultural economists have discussed the relevance of index-based insurances, also called “weather derivatives”, as hedging instruments for volumetric risks in agriculture. Motivated by the question of how weather derivatives should be priced for agricultural firms,...

This paper presents a model and framework for pricing degree-day weather derivatives when the weather variable is a non-traded asset. Using daily weather data from 1840S1996, it is shown that a degree-day weather index exhibits stable volatility and satisfies the random walk hypothesis. The...

This study examines rainfall variability and its implications for wheat production risk in northeast Germany. The hedging effectiveness of rainfall options and the role of geographical basis risk are analyzed using a daily precipitation model. Simpler pricing methods such as the burn analysis...

Purpose – The purpose of this research is to study the weather risk management practices of agriculture producers. In particular, the authors look at the extent to which farmers use weather derivatives to complement insurance. Unlike insurance, weather derivatives mitigate risk associated with...

Purpose – The purpose of this paper is to model and to value a temperature derivative to hedge late frost risk in viticulture. Design/methodology/approach – Starting from 11 years of historical temperature data collected in Mendoza, Argentina, the authors reconstruct the missing data using...