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Pricing Weather Derivatives For Agricultural Risk Management

Author

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

Abstract

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.

Suggested Citation

  • Richards, Timothy J. & Manfredo, Mark R. & Sanders, Dwight R., 2003. "Pricing Weather Derivatives For Agricultural Risk Management," 2003 Conference, April 21-22, 2003, St. Louis, Missouri 18979, NCR-134 Conference on Applied Commodity Price Analysis, Forecasting, and Market Risk Management.
    • Handle: RePEc:ags:ncrthr:18979
    DOI: 10.22004/ag.econ.18979
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    Keywords

    Risk and Uncertainty;

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