Hedging Yield with Weather Derivatives: A Role for Options

Mark Manfredo and Timothy Richards

No 19369, 2005 Annual meeting, July 24-27, Providence, RI from American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association)

Abstract: While there are few risk management alternatives available to specialty crop growers, weather derivatives provide an important advancement. As with the use of any derivatives contract, the behavior of the basis will ultimately determine the net-hedged outcome. However, when using weather derivatives to hedge yield risks for specialty crops, growers face a unique form of basis risk because weather (temperature) and yield are nonlinearly related. Using the forecast encompassing principle, this research shows that the nonlinear relationship between yield and weather creates a role for options in an optimal hedging program. The results suggest that weather derivative instruments with nonlinear payoffs, such as options, be used in combination with linear payoff instruments, such as swaps or futures, to minimize basis risk associated with the nonlinear relationship between yields and weather.

Keywords: Risk; and; Uncertainty (search for similar items in EconPapers)
Pages: 16
Date: 2005
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

Downloads: (external link)
https://ageconsearch.umn.edu/record/19369/files/sp05ma07.pdf (application/pdf)

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:ags:aaea05:19369

DOI: 10.22004/ag.econ.19369

Access Statistics for this paper

More papers in 2005 Annual meeting, July 24-27, Providence, RI from American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association) Contact information at EDIRC.
Bibliographic data for series maintained by AgEcon Search (aesearch@umn.edu).