Basis risk and weather hedging effectiveness
AbstractBasis 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 risk can be significant, it should not preclude the use of geographic cross-hedging, particularly with temperature as opposed to precipitation derivatives. Risk reduction is appreciable and the degree to which geographic basis risk impedes effective hedging diminishes as spatial aggregation in the risk exposure and hedging instrument increases.
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Bibliographic InfoArticle provided by Emerald Group Publishing in its journal Agricultural Finance Review.
Volume (Year): 68 (2008)
Issue (Month): 1 (September)
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Web page: http://www.emeraldinsight.com
Postal: Emerald Group Publishing, Howard House, Wagon Lane, Bingley, BD16 1WA, UK
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- Hardaker, J. Brian & Lien, Gudbrand, 2010. "Probabilities for decision analysis in agriculture and rural resource economics: The need for a paradigm change," Agricultural Systems, Elsevier, vol. 103(6), pages 345-350, July.
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