PRICING WEATHER DERIVATIVES FOR AGRICULTURAL RISK MANAGEMENT

Timothy Richards, Mark Manfredo and Dwight R. Sanders

No 18979, 2003 Conference, April 21-22, 2003, St. Louis, Missouri from NCR-134 Conference on Applied Commodity Price Analysis, Forecasting, and Market Risk Management

Abstract: Existing derivative pricing methods cannot be used to price weather derivatives due to the absence of a hedgeable commodity underlying weather risk and the complexity of weather processes. This study develops a pricing model that considers weather derivatives to be the same as any other financial asset. In this way, the price of a weather derivative is an equilibrium price consistent with both the potential payout at expiry and the market price of risk. We apply this model to the pricing of weather derivatives in the Central Valley of California and find significant differences in prices obtained under alternative weather process assumptions.

Keywords: Risk; and; Uncertainty (search for similar items in EconPapers)
Pages: 17
Date: 2003
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Persistent link: https://EconPapers.repec.org/RePEc:ags:ncrthr:18979

DOI: 10.22004/ag.econ.18979

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