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Livestock Revenue Insurance

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(Revised) This paper outlines several possible structures for livestock revenue insurance. The policies take the form of an exotic option--an Asian basket option. The actuarially fair premiums for these policies are equal to the prices of the options they represent. Due to the complexity of pricing Asian basket options, we have combined two techniques for pricing options to reach the actuarially fair premiums. Projected premiums, producer welfare, and program efficiency are evaluated for the insurance products and existing market tools. Using efficiency ratios and certainty equivalent returns, we compare the insurance policies to strategies involving existing futures and options.

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File URL: http://www.card.iastate.edu/publications/DBS/PDFFiles/99wp224.pdf
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Bibliographic Info

Paper provided by Center for Agricultural and Rural Development (CARD) at Iowa State University in its series Center for Agricultural and Rural Development (CARD) Publications with number 99-wp224.

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Date of creation: Jan 2001
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Handle: RePEc:ias:cpaper:99-wp224

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  1. Babcock, Bruce A. & Choi, E. Kwan & Feinerman, Eli, 1993. "Risk And Probability Premiums For Cara Utility Functions," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 18(01), July.
  2. Levy, Edmond, 1992. "Pricing European average rate currency options," Journal of International Money and Finance, Elsevier, vol. 11(5), pages 474-491, October.
  3. David A. Hennessy & Bruce A. Babcock & Dermot J. Hayes, 1997. "Budgetary and Producer Welfare Effects of Revenue Insurance," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 79(3), pages 1024-1034.
  4. Babcock, Bruce A. & Hennessy, David A., 1996. "Input Demand Under Yield and Revenue Insurance," Staff General Research Papers 794, Iowa State University, Department of Economics.
  5. Jeffrey R. Stokes & William I. Nayda & Burton C. English, 1997. "The Pricing of Revenue Assurance," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 79(2), pages 439-451.
  6. Turnbull, Stuart M. & Wakeman, Lee Macdonald, 1991. "A Quick Algorithm for Pricing European Average Options," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 26(03), pages 377-389, September.
  7. Calum G. Turvey & Vincent Amanor-Boadu, 1989. "Evaluating Premiums for a Farm Income Insurance Policy," Canadian Journal of Agricultural Economics/Revue canadienne d'agroeconomie, Canadian Agricultural Economics Society/Societe canadienne d'agroeconomie, vol. 37(2), pages 233-247, 07.
  8. Holthausen, Duncan M, 1981. "A Risk-Return Model with Risk and Return Measured as Deviations from a Target Return," American Economic Review, American Economic Association, vol. 71(1), pages 182-88, March.
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Citations

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Cited by:
  1. Hau, Arthur, 2006. "Production under uncertainty with insurance or hedging," Insurance: Mathematics and Economics, Elsevier, vol. 38(2), pages 347-359, April.
  2. Chad E. Hart & Dermot J. Hayes & Bruce A. Babcock, 2003. "Insuring Eggs in Baskets," Center for Agricultural and Rural Development (CARD) Publications 03-wp339, Center for Agricultural and Rural Development (CARD) at Iowa State University.
  3. Paulson, Nicholas D. & Hart, Chad E. & Hayes, Dermot J., 2010. "A Spatial Bayesian Approach to Weather Derivatives," Staff General Research Papers 31339, Iowa State University, Department of Economics.
  4. Paulson, Nicholas D. & Babcock, Bruce A. & Hart, Chad E. & Hayes, Dermot J., 2008. "An Insurance Approach to Risk Management in the Ethanol Industry," Staff General Research Papers 12938, Iowa State University, Department of Economics.
  5. Belasco, Eric J., 2008. "The Role of Price Risk Management in Mitigating Fed Cattle Profit Exposure," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 33(3), December.
  6. Shao, Renyuan & Roe, Brian E., 2002. "The Design And Pricing Of Fixed And Moving Window Contracts: An Application Of Asian-Basket Option Pricing Methods To The Hog Finishing Sector," 2002 Annual meeting, July 28-31, Long Beach, CA 19823, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
  7. Bozic, Marin & Newton, John & Thraen, Cameron S. & Gould, Brian W., 2012. "Livestock Gross Margin Insurance for Dairy: Designing Margin Insurance Contracts to Account for Tail Dependence Risk," 2012 Annual Meeting, August 12-14, 2012, Seattle, Washington 124718, Agricultural and Applied Economics Association.
  8. Tack, Jesse, 2013. "A Nested Test for Common Yield Distributions with Applications to U.S. Corn," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 38(1), April.
  9. Turvey, Calum G., 2003. "Conceptual Issues In Livestock Insurance," Working Papers 18171, Rutgers University, Food Policy Institute.
  10. Wong, Kit Pong, 2012. "Production and insurance under regret aversion," Economic Modelling, Elsevier, vol. 29(4), pages 1154-1160.
  11. Zaman, Nadeem Uz & Marri, Sohrab Khan, 2011. "Determinants of increased real prices of livestock in Balochistan," MPRA Paper 32608, University Library of Munich, Germany.

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