Weather Risk Management in Agriculture

Martina Bobriková
Additional contact information
Martina Bobriková: Department of Finance, Faculty of Economics, Technical University of Košice, B. Němcovej 32, 040 01 Košice, Slovak Republic

Acta Universitatis Agriculturae et Silviculturae Mendelianae Brunensis, 2016, vol. 64, issue 4, 1303-1309

Abstract: The paper focuses on valuation of a weather derivative with payoffs depending on temperature. We use historical data from the weather station in the Slovak town Košice to obtain unique prices of option contracts in an incomplete market. Numerical examples of prices of some contracts are presented, using the Burn analysis. We provide an example of how a weather contract can be designed to hedge the financial risk of a suboptimal temperature condition. The comparative comparison of the selected option hedging strategies has shown the best results for the producers in agricultural industries who hedges against an unfavourable weather conditions. The results of analysis proved that by buying put option or call option, the farmer establishes the highest payoff in the case of temperature decrease or increase. The Long Straddle Strategy is the most expensive but is available to the farmer who hedges against a high volatility in temperature movement. We conclude with the findings that weather derivatives could be useful tools to diminish the financial losses for agricultural industries highly dependent for temperature.

Keywords: weather derivative; option contract; temperature; Burn analysis; hedging (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://acta.mendelu.cz/doi/10.11118/actaun201664041303.html (text/html)
http://acta.mendelu.cz/doi/10.11118/actaun201664041303.pdf (application/pdf)
free of charge

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:mup:actaun:actaun_2016064041303

DOI: 10.11118/actaun201664041303

Access Statistics for this article

Acta Universitatis Agriculturae et Silviculturae Mendelianae Brunensis is currently edited by Markéta Havlásková

More articles in Acta Universitatis Agriculturae et Silviculturae Mendelianae Brunensis from Mendel University Press
Bibliographic data for series maintained by Ivo Andrle ().