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Rainfall Index Based Futures: A Tool for Absorbing Systemic Monsoon Risk

Author

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  • Mr. Dileep N
  • Dr. G. Kotreshwar

Abstract

Purpose: The purpose of this paper is to analyse the application and uniqueness of rainfall index-based futures for mitigating rainfall risk which impacts various segments of the economy including agriculture, banking & insurance, agro-processing, and power generation. Design/Methodology/Approach: Research studies have shown that traditional insurance markets are unable to address the problem of rainfall risk adequately. There is need for a versatile financial tool to effectively absorb the rainfall risk. Findings: The structure of Rainfall Futures Contract is presented using standard metrics as Excess Rainfall Days (ERDs) and Deficit Rainfall Days (DRDs). Practical implications: The importance of basis risk in evaluating the feasibility and effectiveness of rainfall index-based futures is examined. Originality value: Rainfall index-based futures represent an innovative financial product introduced by Chicago Mercantile Exchange.

Suggested Citation

  • Mr. Dileep N & Dr. G. Kotreshwar, 2023. "Rainfall Index Based Futures: A Tool for Absorbing Systemic Monsoon Risk," International Journal of Finance, Insurance and Risk Management, International Journal of Finance, Insurance and Risk Management, vol. 13(1), pages 79-87.
    • Handle: RePEc:ers:ijfirm:v:13:y:2023:i:1:p:79-87
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    References listed on IDEAS

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    1. Ivana STULEC & Kristina PETLJAK & Tomislav BAKOVIC, 2016. "Effectiveness of weather derivatives as a hedge against the weather risk in agriculture," Agricultural Economics, Czech Academy of Agricultural Sciences, vol. 62(8), pages 356-362.
    2. Barry J. Barnett & Olivier Mahul, 2007. "Weather Index Insurance for Agriculture and Rural Areas in Lower-Income Countries," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 89(5), pages 1241-1247.
    3. 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.
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    More about this item

    Keywords

    Rainfall Index Based Future; Excess Rainfall Days; Deficit Rainfall Days; Basis Risk; Rainfall risk markets.;
    All these keywords.

    JEL classification:

    • Q50 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - General
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

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