Weather derivatives structuring and pricing: a sustainable agricultural approach in Africa

L. Kermiche and N. Vuillermet

Applied Economics, 2016, vol. 48, issue 2, 165-177

Abstract: The objective of this article is to calculate the price of weather derivatives for different African countries with payout depending on temperature. A new approach for computing degree day contracts is shown and gives another scale to the numerical relevance and practical implementation of the findings. With historical data for each country, a stochastic process based on continuous time with mean reversion representing the evolution of the temperature is determined. Focusing on the Monte Carlo simulation method, the price of each contract and the potential implications to solve several aspects of the threatened African economy are presented.

Date: 2016
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DOI: 10.1080/00036846.2015.1076147

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