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Zur Bewertung von Wetterderivaten als innovative Risikomanagementinstrumente in der Landwirtschaft

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Author Info

  • Musshoff, Oliver
  • Odening, Martin
  • Xu, Wei

Abstract

The importance of weather as a production factor in agriculture is well established long time and a significant portion of yield fluctuations is caused by weather risks. Traditionally, farmers have tried to hedge against unfavorable weather using insurance, such as crop insurance. In recent years a new class of instruments, so called weather derivatives, have emerged. They allows to reduce weather based risks as well. Weather derivatives are financial market products such as forwards, futures, options and swaps, that have a weather component such as temperature or rainfall. Although weather derivatives have some advantages compared to traditional insurance, their trading volume is still rather small. One reason (among others) for why potential users hesitate to enter the market are the difficulties to determine a fair price for these products. Financial pricing methods such as the Black-Scholes formula cannot be directly applied since weather is not a tradable asset. In this article, various pricing methods are investigated and applied to actual weather data. One important finding is that there are considerable differences between the pricing methods. We identify the strengths and weaknesses of the pricing methods and give some recommendations for their application. Our results may be relevant not only for producers but also for potential sellers of weather derivatives.

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Bibliographic Info

Article provided by Humboldt-Universitaet zu Berlin, Department for Agricultural Economics in its journal German Journal of Agricultural Economics.

Volume (Year): 54 (2005)
Issue (Month): 4 ()
Pages:

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Handle: RePEc:ags:gjagec:97216

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Related research

Keywords: weather derivatives; option pricing; actuarial methods; financial methods; Financial Economics; Risk and Uncertainty;

References

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  1. Cao, M. & Wei, J., 1999. "Pricing Weather Derivative : An Equilibrium Approach," Rotman School of Management - Finance 99-002, Rotman School of Management, University of Toronto.
  2. Lucas, Robert E, Jr, 1978. "Asset Prices in an Exchange Economy," Econometrica, Econometric Society, vol. 46(6), pages 1429-45, November.
  3. Sean D. Campbell & Francis X. Diebold, 2005. "Weather Forecasting for Weather Derivatives," Journal of the American Statistical Association, American Statistical Association, vol. 100, pages 6-16, March.
  4. Chen, Gang & Roberts, Matthew C. & Thraen, Cameron S., 2003. "Managing Dairy Profit Risk Using Weather Derivatives," 2003 Conference, April 21-22, 2003, St. Louis, Missouri 18971, NCR-134 Conference on Applied Commodity Price Analysis, Forecasting, and Market Risk Management.
  5. M. Davis, 2001. "Pricing weather derivatives by marginal value," Quantitative Finance, Taylor & Francis Journals, vol. 1(3), pages 305-308.
  6. Robert G. Chambers & John Quiggin, 2004. "Technological and financial approaches to risk management in agriculture: an integrated approach ," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 48(2), pages 199-223, 06.
  7. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-54, May-June.
  8. Nancy McCarthy, 2003. "Demand for rainfall-index based insurance: a case study from Morocco," EPTD discussion papers 106, International Food Policy Research Institute (IFPRI).
  9. Cox, John C & Ingersoll, Jonathan E, Jr & Ross, Stephen A, 1985. "An Intertemporal General Equilibrium Model of Asset Prices," Econometrica, Econometric Society, vol. 53(2), pages 363-84, March.
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Cited by:
  1. Markovic, Todor & Martinovska-Stojcheska, Aleksandra & Ivanovic, Sanjin, 2012. "Risk Reduction In Corn Production With Weather Put Option," 132nd Seminar, October 25-27, 2012, Skopje, Republic of Macedonia 139496, European Association of Agricultural Economists.
  2. Christian Schaper & Ludwig Theuvsen & Achim Spiller, 2010. "Risikoneigung und Risikoverhalten von Milch-erzeugern: Eine Typologisierung," Yearbook of Socioeconomics in Agriculture, Swiss Society for Agricultural Economics and Rural Sociology, vol. 3(1), pages 157-193.
  3. Marković, Todor & Martinovska Stojčeska, Aleksandra & Ivanović, Sanjin, 1. "Risk reduction in maize production using weather put option," Agroeconomia Croatica, Croatian Society of Agricultural Economists, vol. 3(1).
  4. Musshoff, Oliver & Odening, Martin & Xu, Wei, 2006. "Zur Quantifizierung Des Basisrisikos Von Wetterderivaten," 46th Annual Conference, Giessen, Germany, October 4-6, 2006 14947, German Association of Agricultural Economists (GEWISOLA).
  5. Christian Schaper & Christina Beitzen-Heineke & Ludwig Theuvsen, 2008. "Finanzierung und Organisation landwirtschaftlicher Biogasanlagen: Eine empirische Untersuchung," Yearbook of Socioeconomics in Agriculture, Swiss Society for Agricultural Economics and Rural Sociology, vol. 1(1), pages 39-74.

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