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

Hedging with weather derivatives to cope with climate variability and change in grain maize... The effectiveness of hedging drought risks with weather derivatives was investigated for rain‐fed grain maize production in Switzerland under current (1981‐2003) and projected future (2070‐2100) climatic conditions. Depending on location, hedging reduced the value‐at‐ (VaR) measure to a variable degree, although with a considerable basis risk, but hedging may provide a valid risk transfer since loading of 90 per cent to 240 per cent 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 70‐year period considered, which represents a substantial uncertainty for both the farmer and the institution writing the contract. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Agricultural Finance Review Emerald Publishing

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

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Publisher
Emerald Publishing
Copyright
Copyright © 2008 Emerald Group Publishing Limited. All rights reserved.
ISSN
0002-1466
DOI
10.1108/00214660880001219
Publisher site
See Article on Publisher Site

Abstract

The effectiveness of hedging drought risks with weather derivatives was investigated for rain‐fed grain maize production in Switzerland under current (1981‐2003) and projected future (2070‐2100) climatic conditions. Depending on location, hedging reduced the value‐at‐ (VaR) measure to a variable degree, although with a considerable basis risk, but hedging may provide a valid risk transfer since loading of 90 per cent to 240 per cent 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 70‐year period considered, which represents a substantial uncertainty for both the farmer and the institution writing the contract.

Journal

Agricultural Finance ReviewEmerald Publishing

Published: May 5, 2008

Keywords: Agricultural insurance; Economic models; Insurance demand models; Spain

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