Spatially-Aggregated Temperature Derivatives: Agricultural Risk Management in China

Zong, Lu; Ender, Manuela

doi:10.3390/ijfs4030017

IJFS

2016

DOI: 10.3390/ijfs4030017

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Spatially-Aggregated Temperature Derivatives: Agricultural Risk Management in China

Lu Zong

Manuela Ender

Abstract: Abstract:In this paper, a new form of weather derivative contract, namely the climatic zone-based growth degree-day (GDD) contract, is introduced. The objective is to increase the risk management efficiency in the agricultural sector of China and to reduce the model dimension of multi-regional temperature-based weather derivatives pricing. Since the proposed contract serves as a risk management tool for all of the cities in the same climatic zone, we compare the risk hedging power between the climatic zone-bas… Show more

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Cited by 2 publications

References 15 publications

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Hedging Crop Yields Against Weather Uncertainties—A Weather Derivative Perspective

Gyamerah

Ngare

Ikpe

2019

MCA

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The effects of weather on agriculture in recent years have become a major global concern. Hence, the need for an effective weather risk management tool (i.e., weather derivatives) that can hedge crop yields against weather uncertainties. However, most smallholder farmers and agricultural stakeholders are unwilling to pay for the price of weather derivatives (WD) because of the presence of basis risks (product-design and geographical) in the pricing models. To eliminate product-design basis risks, a machine learning ensemble technique was used to determine the relationship between maize yield and weather variables. The results revealed that the most significant weather variable that affected the yield of maize was average temperature. A mean-reverting model with a time-varying speed of mean reversion, seasonal mean, and local volatility that depended on the local average temperature was then proposed. The model was extended to a multi-dimensional model for different but correlated locations. Based on these average temperature models, pricing models for futures, options on futures, and basket futures for cumulative average temperature and growing degree-days are presented. Pricing futures on baskets reduces geographical basis risk, as buyers have the opportunity to select the most appropriate weather stations with their desired weight preference. With these pricing models, farmers and agricultural stakeholders can hedge their crops against the perils of extreme weather.

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Hedging Crop Yields Against Weather Uncertainties—A Weather Derivative Perspective

Gyamerah

Ngare

Ikpe

2019

MCA

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Enhancing Sustainability through Weather Derivative Option Contracts: A Risk Management Tool in Greek Agriculture

Prentzas,

Bournaris,

Nastis

et al. 2024

Sustainability

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This paper investigates the efficacy of weather derivatives as a risk management tool in the agricultural sector of Naousa, Greece, focusing on tree crops sensitive to temperature variations. The specific purpose is to assess how effectively weather derivative options can mitigate financial risks for farmers by providing strategic solutions. The study assesses the strategic application of Heating Degree Days (HDD) index options and their potential to alleviate economic vulnerabilities faced by farmers due to temperatures fluctuations. Employing different strike prices in Long Call and Straddle options strategies on the HDD index, the research offers tailored risk management solutions that cater to varying risk aversions among farmers. Moreover, the study applies the Value at Risk (VaR) methodology to quantify the financial security that weather derivatives can furnish, revealing a significantly reduced probability of severe financial losses in hedged scenarios compared to no-hedge conditions. Results show that all implemented strategies effectively enhance financial outcomes compared to scenarios without hedging, highlighting the exceptional utility of weather derivatives as risk management tools in the agricultural sector. Strategy 4, which exhibits the lowest VaR, emerges as the most effective, providing substantial protection against adverse weather conditions. This research supports the notion that weather derivatives can substantially contribute to the economic sustainability of rural economies, influencing policy decisions toward enhancing financial instruments for risk management in agriculture.

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Spatially-Aggregated Temperature Derivatives: Agricultural Risk Management in China

Cited by 2 publications

References 15 publications

Hedging Crop Yields Against Weather Uncertainties—A Weather Derivative Perspective

Hedging Crop Yields Against Weather Uncertainties—A Weather Derivative Perspective

Enhancing Sustainability through Weather Derivative Option Contracts: A Risk Management Tool in Greek Agriculture

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