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

Mr. Dileep N and Dr. G. Kotreshwar

International Journal of Finance, Insurance and Risk Management, 2023, vol. 13, issue 1, 79-87

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.

Keywords: Rainfall Index Based Future; Excess Rainfall Days; Deficit Rainfall Days; Basis Risk; Rainfall risk markets. (search for similar items in EconPapers)
JEL-codes: Q50 Q54 (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:ers:ijfirm:v:13:y:2023:i:1:p:79-87

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