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Hedging with weather derivatives to cope with climate variability and change in grain maize production

Agricultural Finance Review

ISSN: 0002-1466

Article publication date: 5 May 2008

Abstract

The effectiveness of hedging drought risks with weather derivatives was investigated for rain‐fed grain maize production in Switzerland under current (1981‐2003) and projected future (2070‐2100) climatic conditions. Depending on location, hedging reduced the value‐at‐ (VaR) measure to a variable degree, although with a considerable basis risk, but hedging may provide a valid risk transfer since loading of 90 per cent to 240 per cent of the fair premium can be paid to obtain a hedged situation with improved outcomes relative to the reference. However, the fair premium of a specific contract may vary by a factor of two to four over the 70‐year period considered, which represents a substantial uncertainty for both the farmer and the institution writing the contract.

Keywords

Citation

Simone Torriani, D., Calanca, P., Beniston, M. and Fuhrer, J. (2008), "Hedging with weather derivatives to cope with climate variability and change in grain maize production", Agricultural Finance Review, Vol. 68 No. 1, pp. 67-81. https://doi.org/10.1108/00214660880001219

Publisher

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Emerald Group Publishing Limited

Copyright © 2008, Emerald Group Publishing Limited