Hedging late frost risk in viticulture with exotic options

Elsa Cortina and Ignacio Sánchez

Agricultural Finance Review, 2013, vol. 73, issue 1, 136-160

Abstract: Purpose - The purpose of this paper is to model and to value a temperature derivative to hedge late frost risk in viticulture. Design/methodology/approach - Starting from 11 years of historical temperature data collected in Mendoza, Argentina, the authors reconstruct the missing data using principal component analysis. The frequency content of time series is examined by the periodogram method; ordinary least squares are used to estimate the trends of minimum, maximum and average temperatures, and hypothesis tests of univariate and bivariate normality are performed on deseasonalized and filtered temperature returns. The authors express the temperature dynamics by correlated Ornstein‐Uhlenbeck processes and historical data were fitted into the model to obtain parameters estimates. An Asian‐type option on a temperature index is constructed and its price and sensitivities are computed by Monte Carlo method. Findings - The authors define an index in terms of minimum and average temperatures that, under some simplifying hypotheses, quantifies the damage produced by a late frost. To hedge the late frost risk, an Asian‐type option on the index is constructed. Together with the results concerning the design and pricing of the option, the analysis of historical data reveals non‐negligible linear trends, negative in minimum temperature and positive in maximum and average temperatures. These findings may be consistent with the hypothesis of global warming or with the presence of out‐of‐phase very low frequency components. Originality/value - The authors have not found in the literature a similar option to hedge the risk of spring frosts faced by fruit producers.

Keywords: Weather derivatives; Temperature indices; Late frost risk; Viticulture; Temperature; Temperature measurement; Frost (search for similar items in EconPapers)
Date: 2013
References: Add references at CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
https://www.emerald.com/insight/content/doi/10.110 ... d&utm_campaign=repec (text/html)
https://www.emerald.com/insight/content/doi/10.110 ... d&utm_campaign=repec (application/pdf)
Access to full text is restricted to subscribers

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eme:afrpps:v:73:y:2013:i:1:p:136-160

DOI: 10.1108/00021461311321366

Access Statistics for this article

Agricultural Finance Review is currently edited by Valentina Hartarska and Denis Nadolnyak

More articles in Agricultural Finance Review from Emerald Group Publishing Limited
Bibliographic data for series maintained by Emerald Support ().