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Weather derivatives: Concept and application for their use in South Africa

  • Geyser, J.M.
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    Recent innovations in energy markets suggest the possibility of addressing agricultural risk factors by issuing derivatives on weather elements. Such instruments appear particularly attractive, as asymmetric information and loss adjustment issues do not affect them. This article first describes the concept, functioning and application of weather derivatives. It then examines the feasibility of rainfall derivatives to manage agricultural production risk in South Africa by evaluating the merits of rainfall options, and suggesting an option strategy, as a yield risk management tool. The use of rainfall derivatives in South Africa is likely to increase in future as capital markets, financial institutions, insurance companies, crop insurance companies and hedge funds collectively organize themselves to share and distribute weather risks.

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    File URL: http://purl.umn.edu/9490
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    Article provided by Agricultural Economics Association of South Africa (AEASA) in its journal Agrekon.

    Volume (Year): 43 (2004)
    Issue (Month): 4 (December)
    Pages:

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    Handle: RePEc:ags:agreko:9490
    Contact details of provider: Web page: http://www.aeasa.org.za/
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    1. Gautam, Madhur & Hazell, Peter & Alderman, Harold, 1994. "Rural demand for drought insurance," Policy Research Working Paper Series 1383, The World Bank.
    2. Takeshi Sakurai & Thomas Reardon, 1997. "Potential Demand for Drought Insurance in Burkina Faso and Its Determinants," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 79(4), pages 1193-1207.
    3. M. Davis, 2001. "Pricing weather derivatives by marginal value," Quantitative Finance, Taylor & Francis Journals, vol. 1(3), pages 305-308.
    4. Skees, Jerry & Hazell, P. B. R. & Miranda, Mario, 1999. "New approaches to crop yield insurance in developing countries:," EPTD discussion papers 55, International Food Policy Research Institute (IFPRI).
    5. Martin, Steven W. & Barnett, Barry J. & Coble, Keith H., 2001. "Developing And Pricing Precipitation Insurance," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 26(01), July.
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