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Risk reduction in maize production using weather put option

Author

Listed:
  • Markovic, Todor
  • Martinovska-Stojcheska, Aleksandra
  • Ivanović, Sanjin

Abstract

The aim of this paper is to provide the basic theoretical assumptions about the weather derivatives and to quantify the risk reducing effect of rainfall put-options by applying a stochastic simulation. For this simulation we analyzed the yield data obtained from the maize producing farm located in the central part of Srem (Serbia). A nearby weather station contributed the meteorological data. To attain this goal, we analyze and compare three cases: Revenue without put-option, revenue with put-option, with basis risk and revenue with put-option, without basis risk. In comparison with having no rainfall put-option, the farmer can hedge 10.000 RSD ha-1 with the put-option, considering the basis risk, and even 20.000 RSD ha-1 when not considering basis risk. Consequently the hedging efficiency of the rainfall put-option is substantial in our example.....Cilj ovoga rada jest ponuditi temeljne teoretske pretpostavke u vezi s vremenskim derivatima i učinkom vremenske prodajne opcije na temelju količine padalina na smanjenja rizika primjenom stohastičke simulacije. Za potrebe simulacije provedena je analiza podataka o prinosu dobivenih s poljoprivrednog dobra na kojem se proizvodi kukuruz, a koje se nalazi u središnjem Srijemu (Srbija). Meteorološka postaja, smještena u neposrednoj blizini, bila je izvor meteoroloških podataka. Kako bi smo ostvarili cilj, analizirali smo i usporedili tri slučaja: prihod bez primjene vremenske prodajne opcije, prihod uz primjenu vremenske prodajne opcije s baznim rizikom, i prihod uz primjenu vremenske prodajne opcije bez baznog rizika. U odnosu na neprimjenjivanje vremenske prodajne opcije, poljoprivredni proizvođač može zaštititi od rizika 10,000 RSD haˉ¹ uz primjenu vremenske prodajne opcije s baznim rizikom, odnosnlo 20,000RSD haˉ¹ bez baznog rizika. Iz toga slijedi da učinkovitost eliminacije rizika primjenom vremenske prodajne opcije na temelju količine padalina ima značajnu ulogu u našem primjeru

Suggested Citation

  • Markovic, Todor & Martinovska-Stojcheska, Aleksandra & Ivanović, Sanjin, 2013. "Risk reduction in maize production using weather put option," Agroeconomia Croatica, Croatian Society of Agricultural Economists, vol. 3(1), pages 1-5, September.
    • Handle: RePEc:ags:csaeac:172543
    DOI: 10.22004/ag.econ.172543
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    References listed on IDEAS

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    1. Musshoff, Oliver & Odening, Martin & Xu, Wei, 2005. "Zur Bewertung von Wetterderivaten als innovative Risikomanagementinstrumente in der Landwirtschaft," German Journal of Agricultural Economics, Humboldt-Universitaet zu Berlin, Department for Agricultural Economics, vol. 54(04), pages 1-13.
    2. Vedenov, Dmitry V. & Barnett, Barry J., 2004. "Efficiency of Weather Derivatives as Primary Crop Insurance Instruments," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 29(3), pages 1-17, December.
    3. Calum G. Turvey, 2001. "Weather Derivatives for Specific Event Risks in Agriculture," Review of Agricultural Economics, Agricultural and Applied Economics Association, vol. 23(2), pages 333-351.
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