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Spatially-Aggregated Temperature Derivatives: Agricultural Risk Management in China

Author

Listed:
  • Lu Zong

    (Department of Mathematical Sciences, Xi’an Jiaotong-Liverpool University, Suzhou 215123, China)

  • Manuela Ender

    (Department of Business and Social Sciences, Salzburg University of Applied Sciences, Puch/Salzburg 5412, Austria)

Abstract

In this paper, a new form of weather derivative contract, namely the climatic zone-based growth degree-day (GDD) contract, is introduced. The objective is to increase the risk management efficiency in the agricultural sector of China and to reduce the model dimension of multi-regional temperature-based weather derivatives pricing. Since the proposed contract serves as a risk management tool for all of the cities in the same climatic zone, we compare the risk hedging power between the climatic zone-based and the city-based GDD contracts. As a result, we find that the differences between the two types of temperature-based weather contracts are maintained within a certain range.

Suggested Citation

  • Lu Zong & Manuela Ender, 2016. "Spatially-Aggregated Temperature Derivatives: Agricultural Risk Management in China," IJFS, MDPI, vol. 4(3), pages 1-17, September.
    • Handle: RePEc:gam:jijfss:v:4:y:2016:i:3:p:17-:d:77418
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    References listed on IDEAS

    as
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