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Hedging of crop harvest with derivatives on temperature

Donatien Hainaut

Insurance: Mathematics and Economics, 2019, vol. 84, issue C, 98-114

Abstract: This article studies hedging strategies of crop harvest incomes with futures and options on indexes of cumulated average temperatures (CAT). To account for the time and space dependence, temperatures and crop yields are modeled by three dimensions Gaussian fields. In this framework, we study the features and dynamics of CAT futures and CAT basket options. Next, we find the portfolio of CAT futures minimizing the variance of incomes from crop in different regions. We compare this hedging strategy to the portfolio maximizing the expected exponential utility of incomes. Furthermore, we assess the impact of CAT basket options on the variance of crop incomes. We conclude this work by a realistic case study in which the harvest of green maize in two Belgian regions is hedged against adverse deviations of temperatures with CAT futures or options.

Keywords: Weather derivatives; Crop insurance; Gaussian fields; Dynamic hedging; Weather derivatives Crop; Insurance Gaussian fields; Dynamic hedging Climate risk (search for similar items in EconPapers)
Date: 2019
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Persistent link: https://EconPapers.repec.org/RePEc:eee:insuma:v:84:y:2019:i:c:p:98-114

DOI: 10.1016/j.insmatheco.2018.09.011

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Insurance: Mathematics and Economics is currently edited by R. Kaas, Hansjoerg Albrecher, M. J. Goovaerts and E. S. W. Shiu

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