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Livestock Revenue Insurance

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  • Hart, Chad E.
  • Babcock, Bruce
  • Hayes, Dermot J.

Abstract

This study outlines several possible structures for livestock revenue insurance. The policies take the form of an exotic option—an Asian basket option. The actuarially fair premiums for these policies are equal to the prices of the options they represent. Due to the complexity of pricing Asian basket options, we have combined two techniques for pricing options to reach the actuarially fair premiums. Projected premiums, producer welfare, and program efficiency are evaluated for the insurance products and existing market tools. Using efficiency ratios and certainty equivalent returns, we compare the insurance policies to strategies involving existing futures and options.

Suggested Citation

  • Hart, Chad E. & Babcock, Bruce & Hayes, Dermot J., 2001. "Livestock Revenue Insurance," ISU General Staff Papers 200104250700001290, Iowa State University, Department of Economics.
  • Handle: RePEc:isu:genstf:200104250700001290
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    10. Moshe Arye Milevsky & Steven E. Posner, 1999. "Asian Options, The Sum Of Lognormals, And The Reciprocal Gamma Distribution," World Scientific Book Chapters, in: Marco Avellaneda (ed.), Quantitative Analysis In Financial Markets Collected Papers of the New York University Mathematical Finance Seminar, chapter 7, pages 203-218, World Scientific Publishing Co. Pte. Ltd..
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    Cited by:

    1. Tack, Jesse, 2013. "A Nested Test for Common Yield Distributions with Applications to U.S. Corn," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 38(1), pages 1-14, April.
    2. Zaman, Nadeem Uz & Marri, Sohrab Khan, 2011. "Determinants of increased real prices of livestock in Balochistan," MPRA Paper 32608, University Library of Munich, Germany.
    3. Phélippé-Guinvarc’H, Martial & Cordier, Jean, 2010. "An option on the average European futures prices for an efficient hog producer risk management," Review of Agricultural and Environmental Studies - Revue d'Etudes en Agriculture et Environnement (RAEStud), Institut National de la Recherche Agronomique (INRA), vol. 91(1).
    4. Turvey, Calum G., 2003. "Conceptual Issues In Livestock Insurance," Research Reports 18171, Rutgers University, Food Policy Institute.
    5. Boyer, Christopher N. & Park, Eunchun & Griffith, Andrew P. & DeLong, Karen L. & Martinez, Charles, 2023. "Impact of Subsidy on Livestock Risk Protection for Fed and Feeder Cattle," 2023 Annual Meeting, July 23-25, Washington D.C. 335429, Agricultural and Applied Economics Association.
    6. Paulson, Nicholas David, 2007. "Three essays on risk and uncertainty in agriculture," ISU General Staff Papers 2007010108000016979, Iowa State University, Department of Economics.
    7. Bozic, Marin & Newton, John & Thraen, Cameron S. & Gould, Brian W., 2012. "Livestock Gross Margin Insurance for Dairy: Designing Margin Insurance Contracts to Account for Tail Dependence Risk," 2012 Annual Meeting, August 12-14, 2012, Seattle, Washington 124718, Agricultural and Applied Economics Association.
    8. Paulson, Nicholas D. & Babcock, Bruce A. & Hart, Chad E. & Hayes, Dermot J., 2008. "An Insurance Approach to Risk Management in the Ethanol Industry," Agricultural and Resource Economics Review, Northeastern Agricultural and Resource Economics Association, vol. 37(1), pages 1-12, April.
    9. Paulson, Nicholas David, 2004. "Insuring uncertainty in value-added agriculture: ethanol," ISU General Staff Papers 2004010108000018198, Iowa State University, Department of Economics.
    10. McKendree, Melissa G.S. & Tonsor, Glynn T. & Schulz, Lee L., 2021. "Management of Multiple Sources of Risk in Livestock Production," Journal of Agricultural and Applied Economics, Cambridge University Press, vol. 53(1), pages 75-93, February.
    11. Nicholas D. Paulson & Chad E. Hart & Dermot J. Hayes, 2010. "A spatial Bayesian approach to weather derivatives," Agricultural Finance Review, Emerald Group Publishing Limited, vol. 70(1), pages 79-96, May.
    12. Banterle, Alessandro & Vandone, Daniela, 2013. "Price Volatility and Risk Management: The Case of Rice," 2013 International European Forum, February 18-22, 2013, Innsbruck-Igls, Austria 164766, International European Forum on System Dynamics and Innovation in Food Networks.
    13. Boyer, Christopher N. & Griffith, Andrew P., 2023. "Subsidy Rate Changes on Livestock Risk Protection for Feeder Cattle," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 48(1), January.
    14. Wong, Kit Pong, 2012. "Production and insurance under regret aversion," Economic Modelling, Elsevier, vol. 29(4), pages 1154-1160.
    15. Chad E. Hart & Dermot J. Hayes & Bruce A. Babcock, 2006. "Insuring Eggs in Baskets: Should the Government Insure Individual Risks?," Canadian Journal of Agricultural Economics/Revue canadienne d'agroeconomie, Canadian Agricultural Economics Society/Societe canadienne d'agroeconomie, vol. 54(1), pages 121-137, March.
    16. Hau, Arthur, 2006. "Production under uncertainty with insurance or hedging," Insurance: Mathematics and Economics, Elsevier, vol. 38(2), pages 347-359, April.
    17. Alessandro Banterle & Daniela Vandone, 2019. "Price volatility and risk management: The case of rice in the EU," Economia agro-alimentare, FrancoAngeli Editore, vol. 21(2), pages 255-274.
    18. McKendree, Melissa G.S. & Tonsor, Glynn T. & Schulz, Lee, 2017. "Feedlot operators’ decision making regarding price and animal health risk," 2017 Annual Meeting, July 30-August 1, Chicago, Illinois 258462, Agricultural and Applied Economics Association.
    19. Calum G. Turvey & Jeffrey R. Stokes, 2008. "Market Structure and the Value of Agricultural Contingent Claims," Canadian Journal of Agricultural Economics/Revue canadienne d'agroeconomie, Canadian Agricultural Economics Society/Societe canadienne d'agroeconomie, vol. 56(1), pages 79-94, March.
    20. Chad E. Hart & Dermot J. Hayes & Bruce A. Babcock, 2006. "Insuring Eggs in Baskets: Should the Government Insure Individual Risks?," Canadian Journal of Agricultural Economics/Revue canadienne d'agroeconomie, Canadian Agricultural Economics Society/Societe canadienne d'agroeconomie, vol. 54(1), pages 121-137, March.
    21. Renyuan Shao & Brian Roe, 2003. "The design and pricing of fixed‐ and moving‐window contracts: An application of Asian‐Basket option pricing methods to the hog‐finishing sector," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 23(11), pages 1047-1073, November.
    22. Griffith, Andrew P. & Boyer, Christopher N. & Kane, Ian, 2022. "Literature Review: Price Risk Management Contributions to Economic Sustainability in the Cattle Industry," Extension Reports 322767, University of Tennessee, Department of Agricultural and Resource Economics.
    23. Brandon Schaufele & James R. Unterschultz & Tomas Nilsson, 2010. "AgriStability with Catastrophic Price Risk for Cow‐Calf Producers," Canadian Journal of Agricultural Economics/Revue canadienne d'agroeconomie, Canadian Agricultural Economics Society/Societe canadienne d'agroeconomie, vol. 58(3), pages 361-380, September.
    24. Belasco, Eric J., 2008. "The Role of Price Risk Management in Mitigating Fed Cattle Profit Exposure," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 33(3), pages 1-17.
    25. John Newton & Cameron S. Thraen & Marin Bozic, 2016. "Evaluating Policy Design Choices for the Margin Protection Program for Dairy Producers: An Expected Indemnity Approach," Applied Economic Perspectives and Policy, Agricultural and Applied Economics Association, vol. 38(4), pages 712-730.

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