Spatially-Aggregated Temperature Derivatives: Agricultural Risk Management in China

Lu Zong and Manuela Ender
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Lu Zong: Department of Mathematical Sciences, Xi’an Jiaotong-Liverpool University, Suzhou 215123, China
Manuela Ender: Department of Business and Social Sciences, Salzburg University of Applied Sciences, Puch/Salzburg 5412, Austria

IJFS, 2016, vol. 4, issue 3, 1-17

Abstract: In this paper, a new form of weather derivative contract, namely the climatic zone-based growth degree-day (GDD) contract, is introduced. The objective is to increase the risk management efficiency in the agricultural sector of China and to reduce the model dimension of multi-regional temperature-based weather derivatives pricing. Since the proposed contract serves as a risk management tool for all of the cities in the same climatic zone, we compare the risk hedging power between the climatic zone-based and the city-based GDD contracts. As a result, we find that the differences between the two types of temperature-based weather contracts are maintained within a certain range.

Keywords: agriculture; growth degree-day; risk management; weather derivatives (search for similar items in EconPapers)
JEL-codes: F2 F3 F41 F42 G1 G2 G3 (search for similar items in EconPapers)
Date: 2016
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