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A Derivative Security Approach To Setting Crop Revenue Coverage Insurance Premiums

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  • Stokes, Jeffrey R.

Abstract

The nature of indemnities and reliance on futures price averaging during two distinct time intervals throughout the production year imply Crop Revenue Coverage (CRC) insurance behaves like an exotic put option. Treating this type of insurance as a derivative security, an analytical model is developed and an algorithm for solving the model to place a lower bound on insurance premiums is presented. Monte Carlo simulation, taking into account the path-dependent nature of an Asian-type option, is then used to determine lower-bound estimates for insurance premiums on corn gross revenue under specified price and yield distributions.

Suggested Citation

  • Stokes, Jeffrey R., 2000. "A Derivative Security Approach To Setting Crop Revenue Coverage Insurance Premiums," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 25(1), pages 1-18, July.
    • Handle: RePEc:ags:jlaare:30839
    DOI: 10.22004/ag.econ.30839
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    References listed on IDEAS

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    Cited by:

    1. Nganje, William E. & Tiapo, Napoleon M. & Wilson, William W., 2001. "Crop Insurance Under Quality Uncertainty," 2001 Annual Meeting, July 8-11, 2001, Logan, Utah 36097, Western Agricultural Economics Association.
    2. Richards, Timothy J. & Manfredo, Mark R., 2003. "Infrequent Shocks and Rating Revenue Insurance: A Contingent Claims Approach," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 28(2), pages 1-19, August.
    3. Zhong, Ling & Nie, Jiajia & Yue, Xiaohang & Jin, Minyue, 2023. "Optimal design of agricultural insurance subsidies under the risk of extreme weather," International Journal of Production Economics, Elsevier, vol. 263(C).
    4. Ramirez, Octavio & Shonkwiler, J. Scott, 2016. "Some Comparative Statics for Evaluating the Performance of the US Crop Insurance Program," SCC-76 Meeting, 2016, March 17-19, Pensacola, Florida 233761, SCC-76: Economics and Management of Risk in Agriculture and Natural Resources.
    5. Sherrick, Bruce J., 2002. "The Accuracy Of Producers' Probability Beliefs: Evidence And Implications For Insurance Valuation," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 27(1), pages 1-17, July.
    6. Assa, Hirbod & Sharifi, Hossein & Lyons, Andrew, 2021. "An examination of the role of price insurance products in stimulating investment in agriculture supply chains for sustained productivity," European Journal of Operational Research, Elsevier, vol. 288(3), pages 918-934.
    7. Lu, Yue & Ramirez, Octavio A. & Rejesus, Roderick M. & Knight, Thomas O. & Sherrick, Bruce J., 2008. "Empirically Evaluating the Flexibility of the Johnson Family of Distributions: A Crop Insurance Application," Agricultural and Resource Economics Review, Cambridge University Press, vol. 37(1), pages 79-91, April.
    8. Calum G. Turvey & Shihong Yin, 2002. "On the Pricing of Cross Currency Futures Options for Canadian Grains and Livestock," Canadian Journal of Agricultural Economics/Revue canadienne d'agroeconomie, Canadian Agricultural Economics Society/Societe canadienne d'agroeconomie, vol. 50(3), pages 317-332, November.
    9. Gregory Colson & Octavio A. Ramirez & Shengfei Fu, 2014. "Crop Insurance Savings Accounts: A Viable Alternative to Crop Insurance?," Applied Economic Perspectives and Policy, Agricultural and Applied Economics Association, vol. 36(3), pages 527-545.
    10. Hennessy, David A. & Saak, Alexander E. & Babcock, Bruce A., 2003. "Fair Value Of Whole-Farm And Crop-Specific Revenue Insurance," 2003 Annual meeting, July 27-30, Montreal, Canada 21988, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    11. Hao, Jianqiang & Bathke, Arne & Skees, Jerry R., 2005. "Modeling the Tail Distribution and Ratemaking: An Application of Extreme Value Theory," 2005 Annual meeting, July 24-27, Providence, RI 19190, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    12. Finger, Robert, 2012. "How strong is the “natural hedge”? The effects of crop acreage and aggregation levels," 123rd Seminar, February 23-24, 2012, Dublin, Ireland 122538, European Association of Agricultural Economists.
    13. Calum G. Turvey, 2010. "Biography," Agricultural Finance Review, Emerald Group Publishing Limited, vol. 70(1), pages 5-20, May.
    14. Phelippe-Guinvarc'h, Martial V. & Cordier, Jean E., 2006. "A private management strategy for the crop yield insurer: A theoretical approach and tests," Insurance: Mathematics and Economics, Elsevier, vol. 39(1), pages 35-46, August.
    15. Calum G. Turvey & Jeffrey R. Stokes, 2008. "Market Structure and the Value of Agricultural Contingent Claims," Canadian Journal of Agricultural Economics/Revue canadienne d'agroeconomie, Canadian Agricultural Economics Society/Societe canadienne d'agroeconomie, vol. 56(1), pages 79-94, March.
    16. Holden, Craig W. & Kim, Daniel S., 2017. "Performance share plans: Valuation and empirical tests," Journal of Corporate Finance, Elsevier, vol. 44(C), pages 99-125.
    17. Ramirez, Octavio A. & Shonkwiler, J. Scott, 2017. "A Probabilistic Model of Crop Insurance Purchase Decision," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 42(1), pages 1-17, January.
    18. Sherrick, Bruce J., 2001. "The Accuracy Of Producer Expectations: Evidence And Implications For Insurance Valuation," 2001 Regional Committee NC-221, October 1-2, 2001, McLean, Virginia 132390, Regional Research Committee NC-1014: Agricultural and Rural Finance Markets in Transition.

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