Effectiveness of weather derivatives as a hedge against the weather risk in agriculture

Abstract

Abstract:Weather aff ects the economies worldwide and all economic sectors are to some extent weather sensitive. Agriculture is traditionally highly weather sensitive. While the catastrophic impact of weather has been long recognized, studied and managed the non-catastrophic weather risk gains in importance as the climate change becomes more pronounced. Weather derivatives provide a fl exible management solution for the non-catastrophic weather risk. Th e paper presents weather derivatives as a new weather risk management tool and reviews and discusses the eff ectiveness of their application in agriculture.

Dynamic Correlation between Weather Derivatives and Agricultural Commodity Derivatives: Evidence from the US

“…Besides the risk reduction function which can also be conducted by weather index issuance, weather derivatives eliminate possibilities of moral hazard and adverse selection since the compensation totally depends on the weather index at maturity. Ivana et al (2016) proved this statement by reviewing existing literature about the effectiveness of the application of weather derivatives and weather insurance in agriculture. They observed that geographical location and period covered by the derivatives are the main reason for effectiveness volatility, which refers to the range of price-volatility reduction of agricultural products.…”

“…Weather derivatives are highly correlated with the agriculture industry because both the quantity and quality of crop yield are significantly affected by weather (Ivana et al, 2016). Researchers have been testing the effectiveness of weather derivatives for the agriculture industry in different regions during the past 20 years.…”

Finansowanie działalności innowacyjnej gospodarstw rolnych. Przykład województwa łódzkiego

“…Należy jednocześnie pamiętać, że poza pozyskiwaniem środków finansowych w rolnictwie występuje wiele innych -wymienionych wcześniej -przeszkód i ograniczeń rozwoju działalności innowacyjnej. Zatem same rynki kapitałowe nie będą w stanie przezwyciężyć wszystkich czynników hamujących rozwój w tym zakresie 75 . Rozwiązaniem tej problematycznej sytuacji jest doprowadzenie na obszarach wiejskich do równowagi pomiędzy popytem i podażą usług finansowych.…”

An Actuarial Pricing Method for Air Quality Index Options

“…Due to ethical problems such as adverse selection (i.e., due to information asymmetry) in traditional agricultural insurance [20], recent research has mainly focused on weather index insurance [21,22]. However, insurance is mostly used for catastrophic events, whereas derivatives provide a more flexible risk management tool for non-catastrophic weather risks [23,24]. Gao et al [25] found that using options as a hedging strategy can help retailers improve their expected profits.…”