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Weather derivatives structuring and pricing: a sustainable agricultural approach in Africa

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  • L. Kermiche
  • N. Vuillermet

Abstract

The objective of this article is to calculate the price of weather derivatives for different African countries with payout depending on temperature. A new approach for computing degree day contracts is shown and gives another scale to the numerical relevance and practical implementation of the findings. With historical data for each country, a stochastic process based on continuous time with mean reversion representing the evolution of the temperature is determined. Focusing on the Monte Carlo simulation method, the price of each contract and the potential implications to solve several aspects of the threatened African economy are presented.

Suggested Citation

  • L. Kermiche & N. Vuillermet, 2016. "Weather derivatives structuring and pricing: a sustainable agricultural approach in Africa," Applied Economics, Taylor & Francis Journals, vol. 48(2), pages 165-177, January.
    • Handle: RePEc:taf:applec:v:48:y:2016:i:2:p:165-177
    DOI: 10.1080/00036846.2015.1076147
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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.
    2. Richards, Timothy J. & Manfredo, Mark R. & Sanders, Dwight R., 2004. "Pricing Weather Derivatives," Working Papers 28536, Arizona State University, Morrison School of Agribusiness and Resource Management.
    3. Wolfgang Karl Härdle & Brenda López Cabrera, 2012. "The Implied Market Price of Weather Risk," Applied Mathematical Finance, Taylor & Francis Journals, vol. 19(1), pages 59-95, February.
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    5. Dwight R. Sanders, 2004. "Pricing Weather Derivatives," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 86(4), pages 1005-1017.
    6. Jewson,Stephen & Brix,Anders, 2005. "Weather Derivative Valuation," Cambridge Books, Cambridge University Press, number 9780521843713, September.
    7. Melanie Cao & Jason Wei, 2004. "Weather derivatives valuation and market price of weather risk," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 24(11), pages 1065-1089, November.
    8. Lucas, Robert E, Jr, 1978. "Asset Prices in an Exchange Economy," Econometrica, Econometric Society, vol. 46(6), pages 1429-1445, November.
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