The pricing, structure, and function of weather‐linked bonds, mortgages, and operating credit

The pricing, structure, and function of weather‐linked bonds, mortgages, and operating credit This paper outlines approaches to valuating weather‐linked bonds, mortgages, and operating lines of credit. Using historical data from weather stations in Adrmore, Oklahoma, and Ithaca, New York, indemnities and insurance premiums are computed for specific‐event rainfall insurance. The main contribution of the paper is the development of new and accurate formulae for determining the coupon rates on weather‐linked bonds and the interest rates on weather‐linked mortgages and lines of credit. The empirical aspects of the paper indicate that linking weather risk to debt may be very costly if the risks are common, but the risk premiums on rare or low‐frequency weather risks can be very manageable. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Agricultural Finance Review Emerald Publishing

The pricing, structure, and function of weather‐linked bonds, mortgages, and operating credit

Agricultural Finance Review, Volume 68 (1): 16 – May 5, 2008

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Publisher
Emerald Publishing
Copyright
Copyright © 2008 Emerald Group Publishing Limited. All rights reserved.
ISSN
0002-1466
DOI
10.1108/00214660880001223
Publisher site
See Article on Publisher Site

Abstract

This paper outlines approaches to valuating weather‐linked bonds, mortgages, and operating lines of credit. Using historical data from weather stations in Adrmore, Oklahoma, and Ithaca, New York, indemnities and insurance premiums are computed for specific‐event rainfall insurance. The main contribution of the paper is the development of new and accurate formulae for determining the coupon rates on weather‐linked bonds and the interest rates on weather‐linked mortgages and lines of credit. The empirical aspects of the paper indicate that linking weather risk to debt may be very costly if the risks are common, but the risk premiums on rare or low‐frequency weather risks can be very manageable.

Journal

Agricultural Finance ReviewEmerald Publishing

Published: May 5, 2008

Keywords: Prescription insurance; Rainfall insurance; Weather derivatives; Weather insurance; Weather‐linked bonds; Weather‐linked mortgages

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