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Indifference Pricing of Weather Insurance

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Author Info
Xu, Wei
Odening, Martin
Musshoff, Oliver

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Abstract

This article develops an Indifference Pricing model for a weather derivative that is traded over the counter. The model is used to calculate ask and bid prices for a put option on a weather index in Germany. We find that under moderate risk aversion the maximal bid prices of grain producers exceed the minimal sell prices of insurers only for a few regions and crops, due to the presence of basis risk. Another finding is that the actuarially fair price may lead to wrong conclusions about the market potential of weather insurance.

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Publisher Info
Paper provided by European Association of Agricultural Economists in its series 101st Seminar, July 5-6, 2007, Berlin Germany with number 9267.

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Date of creation: 2007
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Handle: RePEc:ags:eaa101:9267

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Related research
Keywords: Weather insurance; indifference pricing model; basis risk; Risk and Uncertainty;

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References listed on IDEAS
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  1. Patrick L. Brockett & Mulong Wang & Chuanhou Yang & Hong Zou, 2006. "Portfolio Effects and Valuation of Weather Derivatives," The Financial Review, Eastern Finance Association, vol. 41(1), pages 55-76, 02. [Downloadable!] (restricted)
  2. Martin Odening & Oliver Musshoff & Wei Xu, 2007. "Analysis of rainfall derivatives using daily precipitation models: opportunities and pitfalls," Agricultural Finance Review, Emerald Group Publishing, vol. 67(1), pages 135-156, May. [Downloadable!] (restricted)
  3. Myers, Robert J. & Liu, Yanyan & Hanson, Steven D., 2005. "How Should We Value Agricultural Insurance Contracts," 2005 Annual meeting, July 24-27, Providence, RI 19561, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association). [Downloadable!]
  4. Ernst Eberlein & Jean Jacod, 1997. "On the range of options prices (*)," Finance and Stochastics, Springer, vol. 1(2), pages 131-140. [Downloadable!] (restricted)
  5. Timothy J. Richards & Mark R. Manfredo & Dwight R. Sanders, 2004. "Pricing Weather Derivatives," American Journal of Agricultural Economics, American Agricultural Economics Association, vol. 86(4), pages 1005-1017, November. [Downloadable!] (restricted)
  6. Fleege, Trevor A. & Richards, Timothy J. & Manfredo, Mark R. & Sanders, Dwight R., 2004. "The Performance Of Weather Derivatives In Managing Risks Of Specialty Crops," 2004 Conference, April 19-20, 2004, St. Louis, Missouri 19026, NCR-134 Conference on Applied Commodity Price Analysis, Forecasting, and Market Risk Management. [Downloadable!]
  7. Becherer, Dirk, 2003. "Rational hedging and valuation of integrated risks under constant absolute risk aversion," Insurance: Mathematics and Economics, Elsevier, vol. 33(1), pages 1-28, August. [Downloadable!] (restricted)
  8. Lucas, Robert E, Jr, 1978. "Asset Prices in an Exchange Economy," Econometrica, Econometric Society, vol. 46(6), pages 1429-45, November. [Downloadable!] (restricted)
  9. Richards, Timothy J. & Manfredo, Mark R. & Sanders, Dwight R., 2004. "Pricing Weather Derivatives," Working Papers 28536, Arizona State University, Morrison School of Agribusiness and Resource Management. [Downloadable!]
  10. Marek Musiela & Thaleia Zariphopoulou, 2004. "An example of indifference prices under exponential preferences," Finance and Stochastics, Springer, vol. 8(2), pages 229-239, 05. [Downloadable!] (restricted)
  11. Peter Alaton & Boualem Djehiche & David Stillberger, 2002. "On modelling and pricing weather derivatives," Applied Mathematical Finance, Taylor and Francis Journals, vol. 9(1), pages 1-20, March. [Downloadable!] (restricted)
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