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Pricing Weather Derivatives For Agricultural Risk Management

  • Richards, Timothy J.
  • Manfredo, Mark R.
  • Sanders, Dwight R.

Existing derivative pricing methods cannot be used to price weather derivatives due to the absence of a hedgeable commodity underlying weather risk and the complexity of weather processes. This study develops a pricing model that considers weather derivatives to be the same as any other financial asset. In this way, the price of a weather derivative is an equilibrium price consistent with both the potential payout at expiry and the market price of risk. We apply this model to the pricing of weather derivatives in the Central Valley of California and find significant differences in prices obtained under alternative weather process assumptions.

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File URL: http://purl.umn.edu/18979
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Paper provided by NCR-134 Conference on Applied Commodity Price Analysis, Forecasting, and Market Risk Management in its series 2003 Conference, April 21-22, 2003, St. Louis, Missouri with number 18979.

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Date of creation: 2003
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Handle: RePEc:ags:ncrthr:18979
Contact details of provider: Web page: http://www.agebb.missouri.edu/ncrext/ncr134/

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