IDEAS home Printed from https://ideas.repec.org/p/ags/nc2006/133091.html
   My bibliography  Save this paper

Weather-Linked Bonds

Author

Listed:
  • 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
    as

    Download full text from publisher

    File URL: https://ageconsearch.umn.edu/record/133091/files/Turvey2006.pdf
    Download Restriction: no

    File URL: https://libkey.io/10.22004/ag.econ.133091?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Schwartz, Eduardo S, 1982. "The Pricing of Commodity-Linked Bonds," Journal of Finance, American Finance Association, vol. 37(2), pages 525-539, May.
    2. Rudiger Dornbusch & Thomas S. Johnson & Anne O. Krueger, 1988. "Our LDC Debts," NBER Chapters, in: The United States in the World Economy, pages 161-214, National Bureau of Economic Research, Inc.
    3. repec:dau:papers:123456789/3433 is not listed on IDEAS
    4. Calum G. Turvey & Timothy G. Baker, 1990. "A Farm-Level Financial Analysis of Farmers' Use of Futures and Options under Alternative Farm Programs," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 72(4), pages 946-957.
    5. Vedenov, Dmitry V. & Epperson, James E. & Barnett, Barry J., 2006. "Designing Catastrophe Bonds to Securitize Systemic Risks in Agriculture: The Case of Georgia Cotton," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 31(2), pages 1-21, August.
    6. Jeffrey D. Sachs, 1988. "Comprehensive Debt Retirement: The Bolivian Example," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 19(2), pages 705-715.
    7. Mello, Antonio S & Parsons, John E, 2000. "Hedging and Liquidity," The Review of Financial Studies, Society for Financial Studies, vol. 13(1), pages 127-153.
    8. Harrison, J. Michael & Pliska, Stanley R., 1981. "Martingales and stochastic integrals in the theory of continuous trading," Stochastic Processes and their Applications, Elsevier, vol. 11(3), pages 215-260, August.
    9. Richards, Timothy J. & Manfredo, Mark R. & Sanders, Dwight R., 2004. "Pricing Weather Derivatives," Working Papers 28536, Arizona State University, Morrison School of Agribusiness and Resource Management.
    10. Jewson,Stephen & Brix,Anders With contributions by-Name:Ziehmann,Christine, 2005. "Weather Derivative Valuation," Cambridge Books, Cambridge University Press, number 9780521843713.
    11. Joseph Atta-Mensah, 2004. "Commodity-Linked Bonds: A Potential Means for Less-Developed Countries to Raise Foreign Capital," Staff Working Papers 04-20, Bank of Canada.
    12. Jerry R. Skees & Panos Varangis & Donald F. Larson & Paul Siegel, 2002. "Can Financial Markets be Tapped to Help Poor People Cope with Weather Risks?," WIDER Working Paper Series DP2002-23, World Institute for Development Economic Research (UNU-WIDER).
    13. Calum G. Turvey, 2006. "Managing food industry business and financial risks with commodity-linked credit instruments," Agribusiness, John Wiley & Sons, Ltd., vol. 22(4), pages 523-545.
    14. Calum G. Turvey, 2001. "Weather Derivatives for Specific Event Risks in Agriculture," Review of Agricultural Economics, Agricultural and Applied Economics Association, vol. 23(2), pages 333-351.
    15. Skees, Jerry R. & Barnett, Barry J. & Hartell, Jason G., 2006. "Innovations in Government Responses to Catastrophic Risk Sharing for Agriculture in Developing Countries," 2006 Annual Meeting, August 12-18, 2006, Queensland, Australia 25548, International Association of Agricultural Economists.
    16. Carr, Peter, 1987. "A Note on the Pricing of Commodity-Linked Bonds," Journal of Finance, American Finance Association, vol. 42(4), pages 1071-1076, September.
    17. Dwight R. Sanders, 2004. "Pricing Weather Derivatives," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 86(4), pages 1005-1017.
    18. O'Hara, Maureen, 1990. "Financial contracts and international lending," Journal of Banking & Finance, Elsevier, vol. 14(1), pages 11-31, March.
    19. Jensen, Michael C, 1986. "Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers," American Economic Review, American Economic Association, vol. 76(2), pages 323-329, May.
    20. Krugman, Paul, 1988. "Financing vs. forgiving a debt overhang," Journal of Development Economics, Elsevier, vol. 29(3), pages 253-268, November.
    21. 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(1), pages 1-14, July.
    22. Calum G. Turvey & Timothy G. Baker, 1989. "Optimal Hedging under Alternative Capital Structures and Risk Aversion," Canadian Journal of Agricultural Economics/Revue canadienne d'agroeconomie, Canadian Agricultural Economics Society/Societe canadienne d'agroeconomie, vol. 37(1), pages 135-143, March.
    23. World Bank, 2005. "Managing Agricultural Production Risk : Innovations in Developing Countries," World Bank Publications - Reports 8797, The World Bank Group.
    24. 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.
    25. M. C. Thomson & F. J. Doblas-Reyes & S. J. Mason & R. Hagedorn & S. J. Connor & T. Phindela & A. P. Morse & T. N. Palmer, 2006. "Malaria early warnings based on seasonal climate forecasts from multi-model ensembles," Nature, Nature, vol. 439(7076), pages 576-579, February.
    26. Schwartz, Eduardo S, 1997. "The Stochastic Behavior of Commodity Prices: Implications for Valuation and Hedging," Journal of Finance, American Finance Association, vol. 52(3), pages 923-973, July.
    27. Allen M. Featherstone & Charles B. Moss & Timothy G. Baker & Paul V. Preckel, 1988. "The Theoretical Effects of Farm Policies on Optimal Leverage and the Probability of Equity Losses," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 70(3), pages 572-579.
    28. Black, Fischer, 1976. "The pricing of commodity contracts," Journal of Financial Economics, Elsevier, vol. 3(1-2), pages 167-179.
    29. Robert A. Collins, 1985. "Expected Utility, Debt-Equity Structure, and Risk Balancing," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 67(3), pages 627-629.
    30. Gibson, Rajna & Schwartz, Eduardo S, 1990. "Stochastic Convenience Yield and the Pricing of Oil Contingent Claims," Journal of Finance, American Finance Association, vol. 45(3), pages 959-976, July.
    31. Miltersen, Kristian R. & Schwartz, Eduardo S., 1998. "Pricing of Options on Commodity Futures with Stochastic Term Structures of Convenience Yields and Interest Rates," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 33(1), pages 33-59, March.
    32. Ryozo Miura & Hiroaki Yamauchi, 1998. "The Pricing Formula for Commodity-Linked Bonds with Stochastic Convenience Yields and Default Risk," Asia-Pacific Financial Markets, Springer;Japanese Association of Financial Economics and Engineering, vol. 5(2), pages 129-158, May.
    33. Kenen, Peter B, 1990. "Organizing Debt Relief: The Need for a New Institution," Journal of Economic Perspectives, American Economic Association, vol. 4(1), pages 7-18, Winter.
    34. World Bank, 2005. "Managing Agricultural Production Risk : Innovations in Developing Countries," World Bank Publications - Reports 14434, The World Bank Group.
    35. repec:bla:jfinan:v:44:y:1989:i:5:p:1335-50 is not listed on IDEAS
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    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.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Calum G. Turvey, 2006. "Managing food industry business and financial risks with commodity-linked credit instruments," Agribusiness, John Wiley & Sons, Ltd., vol. 22(4), pages 523-545.
    2. Lim, Terence & Lo, Andrew W. & Merton, Robert C. & Scholes, Myron S., 2006. "The Derivatives Sourcebook," Foundations and Trends(R) in Finance, now publishers, vol. 1(5–6), pages 365-572, April.
    3. Zhang, Li, 2008. "Three essays on agricultural risk and insurance," ISU General Staff Papers 2008010108000016857, Iowa State University, Department of Economics.
    4. Joseph Atta-Mensah, 2004. "Commodity-Linked Bonds: A Potential Means for Less-Developed Countries to Raise Foreign Capital," Staff Working Papers 04-20, Bank of Canada.
    5. Turvey, Calum G. & Norton, Michael, 2008. "An Internet-Based Tool for Weather Risk Management," Agricultural and Resource Economics Review, Cambridge University Press, vol. 37(1), pages 63-78, April.
    6. Max F. Schöne & Stefan Spinler, 2017. "A four-factor stochastic volatility model of commodity prices," Review of Derivatives Research, Springer, vol. 20(2), pages 135-165, July.
    7. Juárez-Torres, Miriam & Sánchez-Aragón, Leonardo & Vedenov, Dmitry, 2017. "Weather Derivatives and Water Management in Developing Countries: An Application for an Irrigation District in Central Mexico," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 42(2), May.
    8. Ke Du, 2013. "Commodity Derivative Pricing Under the Benchmark Approach," PhD Thesis, Finance Discipline Group, UTS Business School, University of Technology, Sydney, number 1-2013, January-A.
    9. Paschke, Raphael & Prokopczuk, Marcel, 2007. "Integrating Multiple Commodities in a Model of Stochastic Price Dynamics," MPRA Paper 5412, University Library of Munich, Germany.
    10. Turvey, Calum G. & Weersink, Alfons, 2005. "Pricing Weather Insurance with a Random Strike Price: An Application to the Ontario Ice Wine Harvest," 2005 Annual meeting, July 24-27, Providence, RI 19255, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    11. John Crosby, 2008. "A multi-factor jump-diffusion model for commodities," Quantitative Finance, Taylor & Francis Journals, vol. 8(2), pages 181-200.
    12. P. Karlsson & K. F. Pilz & E. Schlögl, 2017. "Calibrating a market model with stochastic volatility to commodity and interest rate risk," Quantitative Finance, Taylor & Francis Journals, vol. 17(6), pages 907-925, June.
    13. Ke Du, 2013. "Commodity Derivative Pricing Under the Benchmark Approach," PhD Thesis, Finance Discipline Group, UTS Business School, University of Technology, Sydney, number 2, July-Dece.
    14. Mußhoff, O. & Odenin, M. & Wei, X., 2007. "Zur Quantifizierung des Basisrisikos von Wetterderivaten," Proceedings “Schriften der Gesellschaft für Wirtschafts- und Sozialwissenschaften des Landbaues e.V.”, German Association of Agricultural Economists (GEWISOLA), vol. 42, March.
    15. Anh Ngoc Lai & Constantin Mellios, 2016. "Valuation of commodity derivatives with an unobservable convenience yield," Post-Print halshs-01183166, HAL.
    16. Zonggang Ma & Chaoqun Ma & Zhijian Wu, 2022. "Pricing commodity-linked bonds with stochastic convenience yield, interest rate and counterparty credit risk: application of Mellin transform methods," Review of Derivatives Research, Springer, vol. 25(1), pages 47-91, April.
    17. K. F. Pilz & E. Schlögl, 2013. "A hybrid commodity and interest rate market model," Quantitative Finance, Taylor & Francis Journals, vol. 13(4), pages 543-560, March.
    18. Chiarella, Carl & Kang, Boda & Nikitopoulos, Christina Sklibosios & Tô, Thuy-Duong, 2013. "Humps in the volatility structure of the crude oil futures market: New evidence," Energy Economics, Elsevier, vol. 40(C), pages 989-1000.
    19. Björn Lutz, 2010. "Pricing of Derivatives on Mean-Reverting Assets," Lecture Notes in Economics and Mathematical Systems, Springer, number 978-3-642-02909-7, December.
    20. Richter, Martin & Sørensen, Carsten, 2002. "Stochastic Volatility and Seasonality in Commodity Futures and Options: The Case of Soybeans," Working Papers 2002-4, Copenhagen Business School, Department of Finance.

    More about this item

    Keywords

    Agricultural Finance; Risk and Uncertainty;

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ags:nc2006:133091. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: AgEcon Search (email available below). General contact details of provider: https://edirc.repec.org/data/aesukea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.