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Weather-based instruments in the context of whole-farm risk management

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  • Ernst Berg
  • Bernhard Schmitz
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    Abstract

    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 events. However, a number of factors could limit the hedging effectiveness of these tools. These factors include basis risk, the impacts of remaining price uncertainty, and diversification effects. This paper addresses the influence of each of these factors. In the final section, an integrated approach for a comprehensive assessment of weather derivatives and other hedging instruments is proposed that is based on the concept of portfolio optimization.

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    Bibliographic Info

    Article provided by Emerald Group Publishing in its journal Agricultural Finance Review.

    Volume (Year): 68 (2008)
    Issue (Month): 1 (September)
    Pages: 119-133

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    Handle: RePEc:eme:afrpps:v:68:y:2008:i:1:p:119-133

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    Related research

    Keywords: Downside risk; Portfolio optimization; Risk management; Risk-value models; Weather derivatives;

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    Cited by:
    1. M. Ritter & O. Mußhoff & M. Odening, 2014. "Minimizing Geographical Basis Risk of Weather Derivatives Using A Multi-Site Rainfall Model," Computational Economics, Society for Computational Economics, vol. 44(1), pages 67-86, June.
    2. Leif Erec Heimfarth & Oliver Musshoff, 2011. "Weather index-based insurances for farmers in the North China Plain: An analysis of risk reduction potential and basis risk," Agricultural Finance Review, Emerald Group Publishing, vol. 71(2), pages 218-239, July.
    3. Kellner, Ulla & Musshoff, Oliver, 2011. "Precipitation or water capacity indices? An analysis of the benefits of alternative underlyings for index insurance," Agricultural Systems, Elsevier, vol. 104(8), pages 645-653, October.
    4. Hotopp, Henning & Mußhoff, Oliver, 2012. "Can rent adjustment clauses reduce the income risk of farms?," International Journal of Agricultural Management, Institute of Agricultural Management;International Farm Management Association, vol. 1(4), July.
    5. Buchholz, Matthias & Musshoff, Oliver, 2014. "The role of weather derivatives and portfolio effects in agricultural water management," 2014 Conference (58th), February 4-7, 2014, Port Maquarie, Australia 165812, Australian Agricultural and Resource Economics Society.

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