Basis Risk and Weather Hedging Effectiveness

Joshua D. Woodard and Philip Garcia

No 9254, 101st Seminar, July 5-6, 2007, Berlin Germany from European Association of Agricultural Economists

Abstract: Basis risk has been cited as a primary concern for implementing weather hedges. This study investigates several dimensions of weather basis risk for the U.S. corn market at various levels of aggregation. The results suggest that while the degree of geographic basis risk may be significant in some instances, it should not preclude the use of geographic cross-hedging. In addition, the degree to which geographic basis risk impedes effective hedging diminishes as the level of spatial aggregation increases. In fact, geographic basis risk is actually negative in the case most representative of a reinsurance hedge, and the reduction in risk from employing straightforward temperature derivatives is significant. Finally, precipitation hedges are found to introduce additional product basis risk. The findings may be of interest to decision makers considering using exchange traded weather derivatives to hedge agricultural production and insurance risk.

Keywords: Agricultural Finance; Marketing; Risk and Uncertainty (search for similar items in EconPapers)
Pages: 37
Date: 2007
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Citations: View citations in EconPapers (5)

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Journal Article: Basis risk and weather hedging effectiveness (2008)
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Persistent link: https://EconPapers.repec.org/RePEc:ags:eaa101:9254

DOI: 10.22004/ag.econ.9254

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