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Parametric products - innovation in managing agricultural production risk

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  • Jindřich Špička

Abstract

The paper deals with weather derivatives and index-based insurance as the potentially new tools for risk management of agricultural enterprises seeking to mitigate their income exposure to variations in weather conditions. The aim of the paper is to point out some problems of index estimation for the purposes of weather derivatives valuation considering the particularities of agriculture (particularly a basis risk). The analysis was based on multiple linear regression using monthly average air temperatures and monthly precipitation totals (as the independent variables) and natural yields of the main field crops (as dependent variable). The case study was carried out in the district Mladá Boleslav (Middle Bohemia). The basis risk was assessed by modeling of five scenarios of revenue risk management. The results revealed a significant adverse impact of basis risk on the quality of parametric products. The paper also outlines some possible solutions.

Suggested Citation

  • Jindřich Špička, 2011. "Parametric products - innovation in managing agricultural production risk," Ekonomika a Management, Prague University of Economics and Business, vol. 2011(1).
    • Handle: RePEc:prg:jnleam:v:2011:y:2011:i:1:id:122
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    References listed on IDEAS

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    1. SPAULDING Aslihan & KANAKASABAI Murali & HAO Jianqiang & SKEES Jerry, 2010. "Can Weather Derivative Contracts Help Mitigating Agricultural Risk? Microeconomic Policy Implications for Romania," EcoMod2003 330700139, EcoMod.
    2. Jewson,Stephen & Brix,Anders With contributions by-Name:Ziehmann,Christine, 2005. "Weather Derivative Valuation," Cambridge Books, Cambridge University Press, number 9780521843713.
    3. Vedenov, Dmitry V. & Barnett, Barry J., 2004. "Efficiency of Weather Derivatives as Primary Crop Insurance Instruments," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 29(3), pages 1-17, December.
    4. Calum G. Turvey, 2001. "Weather Derivatives for Specific Event Risks in Agriculture," Review of Agricultural Economics, Agricultural and Applied Economics Association, vol. 23(2), pages 333-351.
    5. Barry J. Barnett & Olivier Mahul, 2007. "Weather Index Insurance for Agriculture and Rural Areas in Lower-Income Countries," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 89(5), pages 1241-1247.
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    More about this item

    Keywords

    Řízení rizik; Zemědělství; Agriculture; klimatické deriváty; Weather derivatives; Risk management; bazické riziko; indexní pojištění; basis risk; index-based insurance;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • Q14 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Agricultural Finance

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