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Weather-Linked Bonds

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  • Turvey, Calum G.
  • Chantarat, Sommarat

Abstract

The increased interest in weather-based risk management tools in developed and developing nations gives rise to examining a new set of risk-contingent structured financial products. This paper examines a variety of models applicable to agriculture and the sovereign debt of developing agrarian nations including from the corporate side, weather-linked bonds, and from the producer side weather-linked loans and weather linked mortgages. These weather risk management tools are targeted towards mitigating both business and financial risk by reducing the contractual obligation of debt (principal and/or interest) depending on the intrinsic value of an attached weather option (e.g. excess heat or precipitation) which pays off if a specific weather event occurs. The paper also discusses the structure of a famine bond, which provides funds in advance of a high probability famine event brought about by a specific weather event such as drought. The models presented have broad application to agricultural economies that suffer from weather induced volumetric (production) risk.

Suggested Citation

  • Turvey, Calum G. & Chantarat, Sommarat, 2006. "Weather-Linked Bonds," 2006 Agricultural and Rural Finance Markets in Transition, October 2-3, 2006, Washington, DC 133091, Regional Research Committee NC-1014: Agricultural and Rural Finance Markets in Transition.
  • Handle: RePEc:ags:nc2006:133091
    DOI: 10.22004/ag.econ.133091
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    Cited by:

    1. Shee, Apurba & Turvey, Calum G., 2008. "Commodity Linked Credit: A Risk Management Instrument for the Agrarians in India," 2007 Agricultural and Rural Finance Markets in Transition, October 4-5, 2007, St. Louis, Missouri 48139, Regional Research Committee NC-1014: Agricultural and Rural Finance Markets in Transition.
    2. Jerry R. Skees & Barry J. Barnett & Anne G. Murphy, 2008. "Creating insurance markets for natural disaster risk in lower income countries: the potential role for securitization," Agricultural Finance Review, Emerald Group Publishing Limited, vol. 68(1), pages 151-167, May.

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    Agricultural Finance; Risk and Uncertainty;

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