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Indifference Pricing of Weather Insurance

Author

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  • Xu, Wei
  • Odening, Martin
  • Musshoff, Oliver

Abstract

This article develops an Indifference Pricing model for a weather derivative that is traded over the counter. The model is used to calculate ask and bid prices for a put option on a weather index in Germany. We find that under moderate risk aversion the maximal bid prices of grain producers exceed the minimal sell prices of insurers only for a few regions and crops, due to the presence of basis risk. Another finding is that the actuarially fair price may lead to wrong conclusions about the market potential of weather insurance.

Suggested Citation

  • Xu, Wei & Odening, Martin & Musshoff, Oliver, 2007. "Indifference Pricing of Weather Insurance," 101st Seminar, July 5-6, 2007, Berlin Germany 9267, European Association of Agricultural Economists.
    • Handle: RePEc:ags:eaa101:9267
    DOI: 10.22004/ag.econ.9267
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    References listed on IDEAS

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    Cited by:

    1. Musshoff, Oliver & Hirschauer, Norbert, 2008. "Hedging von Mengenrisiken in der Landwirtschaft – Wie teuer dürfen „ineffektive“ Wetterderivate sein?," German Journal of Agricultural Economics, Humboldt-Universitaet zu Berlin, Department for Agricultural Economics, vol. 57(05), pages 1-12.
    2. Bobojonov, Ihtiyor & Sommer, Rolf, 2011. "Alternative Insurance Indexes for Drought Risk in Developing Countries," 2011 International Congress, August 30-September 2, 2011, Zurich, Switzerland 114256, European Association of Agricultural Economists.
    3. Nelson Christopher Dzupire & Philip Ngare & Leo Odongo, 2019. "Pricing Basket Weather Derivatives on Rainfall and Temperature Processes," IJFS, MDPI, vol. 7(3), pages 1-14, June.
    4. Baez, Karen & Iglesias, Eva, 2011. "Innovative Tools To Address Drought Risk In Grazing Lands," 2011 International Congress, August 30-September 2, 2011, Zurich, Switzerland 114232, European Association of Agricultural Economists.

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