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The pricing, structure, and function of weather-linked bonds, mortgages, and operating credit

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  • Calum G. Turvey

Abstract

This paper outlines approaches to valuating weather-linked bonds, mortgages, and operating lines of credit. Using historical data from weather stations in Adrmore, Oklahoma, and Ithaca, New York, indemnities and insurance premiums are computed for specific-event rainfall insurance. The main contribution of the paper is the development of new and accurate formulae for determining the coupon rates on weather-linked bonds and the interest rates on weather-linked mortgages and lines of credit. The empirical aspects of the paper indicate that linking weather risk to debt may be very costly if the risks are common, but the risk premiums on rare or low-frequency weather risks can be very manageable.

Suggested Citation

  • Calum G. Turvey, 2008. "The pricing, structure, and function of weather-linked bonds, mortgages, and operating credit," Agricultural Finance Review, Emerald Group Publishing, vol. 68(1), pages 135-150, May.
  • Handle: RePEc:eme:afrpps:v:68:y:2008:i:1:p:135-150
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    References listed on IDEAS

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    1. John C. Quiggin & Giannis Karagiannis & J. Stanton, 1993. "Crop Insurance And Crop Production: An Empirical Study Of Moral Hazard And Adverse Selection," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, pages 95-113.
    2. Keith H. Coble & Thomas O. Knight & Rulon D. Pope & Jeffery R. Williams, 1996. "Modeling Farm-Level Crop Insurance Demand with Panel Data," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 78(2), pages 439-447.
    3. Bruce A. Babcock & David A. Hennessy, 1996. "Input Demand under Yield and Revenue Insurance," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 78(2), pages 416-427.
    4. Barnett, Barry J., 2004. "Agricultural Index Insurance Products: Strengths And Limitations," Agricultural Outlook Forum 2004 32971, United States Department of Agriculture, Agricultural Outlook Forum.
    5. Vincent H. Smith & Barry K. Goodwin, 1996. "Crop Insurance, Moral Hazard, and Agricultural Chemical Use," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 78(2), pages 428-438.
    6. Moschini, GianCarlo & Hennessy, David, 1999. "Uncertainty, Risk Aversion and Risk Management for Agricultural Producers," ISU General Staff Papers 199907010700001320, Iowa State University, Department of Economics.
    7. Moschini, Giancarlo & Hennessy, David A., 2001. "Uncertainty, risk aversion, and risk management for agricultural producers," Handbook of Agricultural Economics,in: B. L. Gardner & G. C. Rausser (ed.), Handbook of Agricultural Economics, edition 1, volume 1, chapter 2, pages 88-153 Elsevier.
    8. Goodwin, Barry K., 1994. "Premium Rate Determination In The Federal Crop Insurance Program: What Do Averages Have To Say About Risk?," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 19(02), December.
    9. Nimon, R. Wesley & Mishra, Ashok K., 2001. "Revenue Insurance and Chemical Input Use Rates," 2001 Annual meeting, August 5-8, Chicago, IL 20669, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
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    Cited by:

    1. Million Tadesse & Bekele Shiferaw & Olaf Erenstein, 2015. "Weather index insurance for managing drought risk in smallholder agriculture: lessons and policy implications for sub-Saharan Africa," Agricultural and Food Economics, Springer;Italian Society of Agricultural Economics (SIDEA), pages 1-21.
    2. repec:eee:touman:v:32:y:2011:i:1:p:62-68 is not listed on IDEAS

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