Hedging crop yields against weather uncertainties -- a weather derivative perspective
| Autor: | Samuel Asante Gyamerah, Dennis Ikpe, Philip Ngare |
|---|---|
| Rok vydání: | 2019 |
| Předmět: |
010504 meteorology & atmospheric sciences
97M10 97M30 01 natural sciences lcsh:QA75.5-76.95 FOS: Economics and business weather derivatives Extreme weather agricultural risk management 0502 economics and business Mean reversion Econometrics growing degree-days 050207 economics Hedge (finance) Basis risk 0105 earth and related environmental sciences lcsh:T57-57.97 lcsh:Mathematics Applied Mathematics 05 social sciences General Engineering basis risk Weather derivative Growing degree-day lcsh:QA1-939 Mathematical Finance (q-fin.MF) Computational Mathematics Quantitative Finance - Mathematical Finance Local volatility lcsh:Applied mathematics. Quantitative methods Environmental science lcsh:Electronic computers. Computer science Pricing of Securities (q-fin.PR) Quantitative Finance - Pricing of Securities Futures contract cumulative average temperature |
| Zdroj: | Mathematical and Computational Applications Volume 24 Issue 3 Mathematical and Computational Applications, Vol 24, Iss 3, p 71 (2019) |
| DOI: | 10.48550/arxiv.1905.07546 |
| Popis: | The effects of weather on agriculture in recent years have become a major global concern. Hence, the need for an effective weather risk management tool (i.e., weather derivatives) that can hedge crop yields against weather uncertainties. However, most smallholder farmers and agricultural stakeholders are unwilling to pay for the price of weather derivatives (WD) because of the presence of basis risks (product-design and geographical) in the pricing models. To eliminate product-design basis risks, a machine learning ensemble technique was used to determine the relationship between maize yield and weather variables. The results revealed that the most significant weather variable that affected the yield of maize was average temperature. A mean-reverting model with a time-varying speed of mean reversion, seasonal mean, and local volatility that depended on the local average temperature was then proposed. The model was extended to a multi-dimensional model for different but correlated locations. Based on these average temperature models, pricing models for futures, options on futures, and basket futures for cumulative average temperature and growing degree-days are presented. Pricing futures on baskets reduces geographical basis risk, as buyers have the opportunity to select the most appropriate weather stations with their desired weight preference. With these pricing models, farmers and agricultural stakeholders can hedge their crops against the perils of extreme weather. Comment: 28 pages, 6 figures |
| Databáze: | OpenAIRE |
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