Hedging with weather derivatives to cope with climate variability and change in grain maize production

Abstract

The effectiveness of hedglng drought risks with weather derivatives was investigated for rain-fed grain maize production in Switzerland under current ( I 98 I-2003) and projected future {2O7O-2LOO) climatic conditions. Depending on location, hedging reduced the value-at-risk [VaR) measure to a variable degree, although with a considerable basis risk, but hedging may provide a rralid risk transfer since loading of 90% to 24Oo/o of the fair premium can be paid to obtain a hedged situation with improved outcomes relative to the reference. However. the fair premium of a specific contract may vary by a factor of two to four over the 7O-year period considered, which represents a substantial uncertainty for both the farmer and the institution writing the contract.