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Weather Risk Management in Agriculture

Author

Listed:
  • Martina Bobriková

    (Department of Finance, Faculty of Economics, Technical University of Košice, B. Němcovej 32, 040 01 Košice, Slovak Republic)

Abstract

The paper focuses on valuation of a weather derivative with payoffs depending on temperature. We use historical data from the weather station in the Slovak town Košice to obtain unique prices of option contracts in an incomplete market. Numerical examples of prices of some contracts are presented, using the Burn analysis. We provide an example of how a weather contract can be designed to hedge the financial risk of a suboptimal temperature condition. The comparative comparison of the selected option hedging strategies has shown the best results for the producers in agricultural industries who hedges against an unfavourable weather conditions. The results of analysis proved that by buying put option or call option, the farmer establishes the highest payoff in the case of temperature decrease or increase. The Long Straddle Strategy is the most expensive but is available to the farmer who hedges against a high volatility in temperature movement. We conclude with the findings that weather derivatives could be useful tools to diminish the financial losses for agricultural industries highly dependent for temperature.

Suggested Citation

  • Martina Bobriková, 2016. "Weather Risk Management in Agriculture," Acta Universitatis Agriculturae et Silviculturae Mendelianae Brunensis, Mendel University Press, vol. 64(4), pages 1303-1309.
    • Handle: RePEc:mup:actaun:actaun_2016064041303
    DOI: 10.11118/actaun201664041303
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    References listed on IDEAS

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    1. Eckhard Platen & Jason West, 2004. "A Fair Pricing Approach to Weather Derivatives," Asia-Pacific Financial Markets, Springer;Japanese Association of Financial Economics and Engineering, vol. 11(1), pages 23-53, March.
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    3. Michal Soltes & Lukas Pinka, 2015. "Innovation In Alternative Forms Of Investments," Polish Journal of Management Studies, Czestochowa Technical University, Department of Management, vol. 11(1), pages 168-178, June.
    4. Šaltytė Benth, Jūratė & Benth, Fred Espen, 2012. "A critical view on temperature modelling for application in weather derivatives markets," Energy Economics, Elsevier, vol. 34(2), pages 592-602.
    5. Francisco Pérez-González & Hayong Yun, 2013. "Risk Management and Firm Value: Evidence from Weather Derivatives," Journal of Finance, American Finance Association, vol. 68(5), pages 2143-2176, October.
    6. Frank Schiller & Gerold Seidler & Maximilian Wimmer, 2012. "Temperature models for pricing weather derivatives," Quantitative Finance, Taylor & Francis Journals, vol. 12(3), pages 489-500, March.
    7. Manuela Ender & Ruyuan Zhang, 2015. "Efficiency of weather derivatives for Chinese agriculture industry," China Agricultural Economic Review, Emerald Group Publishing Limited, vol. 7(1), pages 102-121, February.
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