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

Author

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  • Angelos Prentzas

    (Department of Agricultural Economics, Aristotle University of Thessaloniki, 54124 Thessaloniki, Greece)

  • Thomas Bournaris

    (Department of Agricultural Economics, Aristotle University of Thessaloniki, 54124 Thessaloniki, Greece)

  • Stefanos Nastis

    (Department of Agricultural Economics, Aristotle University of Thessaloniki, 54124 Thessaloniki, Greece)

  • Christina Moulogianni

    (Department of Agricultural Economics, Aristotle University of Thessaloniki, 54124 Thessaloniki, Greece)

  • George Vlontzos

    (Department of Agriculture, Crop Production and Rural Development, University of Thessaly, 38446 Volos, Greece)

Abstract

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.

Suggested Citation

  • Angelos Prentzas & Thomas Bournaris & Stefanos Nastis & Christina Moulogianni & George Vlontzos, 2024. "Enhancing Sustainability through Weather Derivative Option Contracts: A Risk Management Tool in Greek Agriculture," Sustainability, MDPI, vol. 16(17), pages 1-18, August.
    • Handle: RePEc:gam:jsusta:v:16:y:2024:i:17:p:7372-:d:1464987
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    References listed on IDEAS

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