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Hedging with weather derivatives to cope with climate variability and change in grain maize production

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Author Info

  • Daniele Simone Torriani
  • Pierluigi Calanca
  • Martin Beniston
  • Jürg Fuhrer
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    Abstract

    The effectiveness of hedging drought risks with weather derivatives was investigated for rain-fed grain maize production in Switzerland under current (1981-2003) and projected future (2070-2100) climatic conditions. Depending on location, hedging reduced the value-at- (VaR) measure to a variable degree, although with a considerable basis risk, but hedging may provide a valid risk transfer since loading of 90 per cent to 240 per cent of the fair premium can be paid to obtain a hedged situation with improved outcomes relative to the reference. However, the fair premium of a specific contract may vary by a factor of two to four over the 70-year period considered, which represents a substantial uncertainty for both the farmer and the institution writing the contract.

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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: 67-81

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    Handle: RePEc:eme:afrpps:v:68:y:2008:i:1:p:67-81

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    Related research

    Keywords: Agricultural insurance; Economic models; Insurance demand models; Spain;

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    Cited by:
    1. Finger, Robert & Lehmann, Niklaus, 2011. "Do Direct Payments Influence Farmers' Hail Insurance Decisions?," 2011 International Congress, August 30-September 2, 2011, Zurich, Switzerland 114355, European Association of Agricultural Economists.
    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. Finger, Robert, 2012. "How strong is the “natural hedge”? The effects of crop acreage and aggregation levels," 123rd Seminar, February 23-24, 2012, Dublin, Ireland 122538, European Association of Agricultural Economists.

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