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Article
Publication date: 3 May 2013

Saqib Khan, Morina Rennie and Sylvain Charlebois

The purpose of this research is to study the weather risk management practices of agriculture producers. In particular, the authors look at the extent to which farmers use…

Abstract

Purpose

The purpose of this research is to study the weather risk management practices of agriculture producers. In particular, the authors look at the extent to which farmers use weather derivatives to complement insurance. Unlike insurance, weather derivatives mitigate risk associated with low intensity, high probability events and therefore offer the potential of a more complete hedge than insurance alone.

Design/methodology/approach

The authors conducted a survey of grain farmers in the province of Saskatchewan, Canada, a typical jurisdiction in which farmers tend to face weather events that are high in frequency but low in severity, to study the usage of weather derivatives compared to insurance and identify the hurdles to their usage.

Findings

The authors find that fewer than 10 percent of their respondents use weather derivatives. Consistent with previous literature in other contexts, they identify participation costs, especially lack of awareness, to be the most significant hurdle to their usage.

Research limitations/implications

A limitation of this study is that the data were collected using a survey methodology and are therefore subject to the usual risks of bias associated with that approach. Moreover, because the authors' survey was delivered online, it may have favoured the participation of farmers that were more comfortable with technology and some bias may have also been introduced into the data as a result.

Practical implications

The authors' findings suggest that there is significant potential to improve farmers' ability to hedge weather risk and thereby improve economic outcomes if the major barriers to the usage of weather derivatives can be overcome. The study paves the way for further research to support the development of public policy strategies that could help farmers take advantage of weather derivatives as part of their inventory of risk management tools.

Originality/value

To the authors' knowledge this is the first study that quantifies the usage of weather derivatives by agriculture producers and identifies the hurdles.

Details

Agricultural Finance Review, vol. 73 no. 1
Type: Research Article
ISSN: 0002-1466

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Article
Publication date: 6 March 2007

Anil K. Sharma and Ashutosh Vashishtha

This article aims to examine the state of risk management in agriculture and power sector of India, evaluate the effectiveness of weather derivatives as alternative risk

Abstract

Purpose

This article aims to examine the state of risk management in agriculture and power sector of India, evaluate the effectiveness of weather derivatives as alternative risk management tools and basic framework required to implement them.

Design/methodology/approach

Applications of traditional risk‐hedging tools and techniques in Indian agricultural and power sectors have proved to be costly, inadequate, and more importantly, a drag on the country's fiscal system. Mostly they offer a hedge against only the price risk. The volume related risk, which is rather more serious and highly weather‐dependent, remains practically unhedged. This study has used existing literature and empirical evidences for analyzing the various issues related to risk management in agriculture and power sector. Traditional derivative strategies have been used to construct weather derivatives contracts with different underlying weather indices.

Findings

The article suggests that how an appropriate weather‐based derivative contract system may be a more flexible, economical and sustainable way of managing the volume‐related weather risk in an economy, like India, having predominant agricultural and power sectors.

Originality/value

The article will be of value to all those who have some stakes in agricultural and power sectors of an economy and would like to mange the volume related risk in these sectors.

Details

The Journal of Risk Finance, vol. 8 no. 2
Type: Research Article
ISSN: 1526-5943

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Article
Publication date: 28 August 2019

Pankaj Singh and Gaurav Agrawal

The purpose of this paper is to review research on weather index insurance (WII) for mitigating the weather risk in agriculture and to identify research gaps in current…

Abstract

Purpose

The purpose of this paper is to review research on weather index insurance (WII) for mitigating the weather risk in agriculture and to identify research gaps in current available literature through integrative review.

Design/methodology/approach

This paper is based on the integrative review method as proposed by Whittemore and Knafl. QualSysts tool was adopted for assessing the quality appraisal of articles. Reporting followed the Preferred Reporting Items for Systematic Reviews and Meta-Analyses (PRISMA) guidelines.

Findings

Detailed critical analysis of content reveals that WII studies are growing and shifting from traditional to the newest themes. Efficacy of WII is significantly influenced by the impacts of climate change. This paper generates a conceptual framework by synthesizing the published literature on WII.

Research limitations/implications

This paper will be used to improve the WII practices and influence public policy. It is also beneficial in research by contributing to the systematic body of knowledge and useful for researchers to analyze the past and present status with future prospects of further studies on WII.

Originality/value

The paper is the original work of the author. To the best of authors’ knowledge, this is the first paper on integrative review on the efficacy of WII. An attempt has been made in the current paper to critically examine the studies of WII.

Details

International Journal of Ethics and Systems, vol. 35 no. 4
Type: Research Article
ISSN: 2514-9369

Keywords

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Article
Publication date: 1 June 2003

Carole Edrich

Abstract

Details

Journal of Financial Regulation and Compliance, vol. 11 no. 2
Type: Research Article
ISSN: 1358-1988

Keywords

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Article
Publication date: 17 August 2010

Mulong Wang, Min‐Ming Wen and Charles C. Yang

The paper aims to examine theoretically valuation of weather derivatives and their hedging roles in corporate risk management.

Abstract

Purpose

The paper aims to examine theoretically valuation of weather derivatives and their hedging roles in corporate risk management.

Design/methodology/approach

The paper introduces an extended financial market model in which the weather risk is included as an independent random process and examines the effectiveness of weather derivatives and traditional price forwards in a unified theoretical framework. It also provides a no‐arbitrage approach to price weather derivatives, which theoretically combines the actuarial and financial paradigms.

Findings

The results document that corporate leverage level is an essential factor determining the choice between price forwards and weather derivatives. In some cases; weather derivatives outperform price forwards, while in some other cases; a joint use of both instruments is optimal, depending on the firm's risky leverage level. Interestingly, the paper identifies the case when the leverage level is very high, the positive roles of both instruments diminish and the firm is unhedgeable.

Originality/value

The paper provides important insights to investors and hedgers and extends the literature on corporate risk management.

Details

The Journal of Risk Finance, vol. 11 no. 4
Type: Research Article
ISSN: 1526-5943

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Article
Publication date: 19 July 2018

Wenjun Zhu, Lysa Porth and Ken Seng Tan

The purpose of this paper is to propose an improved reinsurance pricing framework, which includes a crop yield forecasting model that integrates weather variables and crop…

Abstract

Purpose

The purpose of this paper is to propose an improved reinsurance pricing framework, which includes a crop yield forecasting model that integrates weather variables and crop production information from different geographically correlated regions using a new credibility estimator, and closed form reinsurance pricing formulas. A yield restatement approach to account for changing crop mix through time is also demonstrated.

Design/methodology/approach

The new crop yield forecasting model is empirically analyzed based on detailed farm-level data from Manitoba, Canada, covering 216 crop varieties from 19,238 farms from 1996 to 2011. As well, corresponding weather data from 30 stations, including daily temperature and precipitation, are considered. Algorithms that combine screening regression, cross-validation and principal component analysis are evaluated for the purpose of achieving efficient dimension reduction and model selection.

Findings

The results show that the new yield forecasting model provides significant improvements over the classical regression model, both in terms of in-sample and out-of-sample forecasting abilities.

Research limitations/implications

The empirical analysis is limited to data from the province of Manitoba, Canada, and other regions may show different results.

Practical implications

This research is useful from a risk management perspective for insurers and reinsurers, and the framework may also be used to develop improved weather risk management strategies to help manage adverse weather events.

Originality/value

This is the first paper to integrate a credibility estimator for crop yield forecasting, and develop a closed form reinsurance pricing formula.

Details

Agricultural Finance Review, vol. 79 no. 1
Type: Research Article
ISSN: 0002-1466

Keywords

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Article
Publication date: 2 February 2010

Calum G. Turvey and Rong Kong

The purpose of this paper is to investigate weather risks facing Chinese farmers, and to determine whether farmers would have a preference for weather insurance over other…

Abstract

Purpose

The purpose of this paper is to investigate weather risks facing Chinese farmers, and to determine whether farmers would have a preference for weather insurance over other types of agricultural insurance.

Design/methodology/approach

The data are based on 1,564 farm households surveyed in Shaanxi, Henan, and Gansu provinces in Central China between October 2007 and 2008.

Findings

Results suggest that the greater risk for farmers is drought followed by excessive rain. Heat is less critical as a risk but more significant than cool weather. Results suggest a strong interest in precipitation insurance with 50 and 44 percent of respondents indicating strong interest in the product. Supplementary results indicate that interest is equal between planting, cultivating, and harvesting. Furthermore, results suggest that farmers are willing to adopt new ideas, and where possible action has already been taken to self‐insure through diversification and other means.

Research limitations/implications

This research is based on primary data gathered in China. However, the authors are limited in the access to Chinese weather station data to illustrate how weather insurance operates. Instead, the authors use weather data from the weather station in Ashland, Kansas which has similarities to the wheat growing regions of China. While the example is for illustrative purposes only, the authors cannot claim that it actually represents premiums that might actually be found in China.

Practical implications

The Chinese Government has within the past year authorized an investigation into agricultural insurance. The burst of research and applications of weather insurance in both developed and developing countries suggest that a wide array of applications could be feasible in China. The results are encouraging because they suggest that farmers in China would have an interest in purchasing weather insurance.

Originality/value

The authors believe that this is the first study conducted on weather insurance in China. The survey instrument is designed to specifically determine what weather risks are important to Chinese farmers and the interest that farmers would have in using such a product.

Details

China Agricultural Economic Review, vol. 2 no. 1
Type: Research Article
ISSN: 1756-137X

Keywords

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Article
Publication date: 5 January 2010

Alieva Ghiulnara and Cristina Viegas

The purpose of this paper is to present an overview of weather derivatives markets and to highlight the importance of the contributing factors for weather risk management

Abstract

Purpose

The purpose of this paper is to present an overview of weather derivatives markets and to highlight the importance of the contributing factors for weather risk management such as weather sensitivity, weather forecast, and economic growth. In this paper, the prospective of using weather derivatives in Portugal and why Portugal should use such instruments as well as the potential of Portugal's enterprises are presented.

Design/methodology/approach

This paper attempts to distinguish the reasons for the appearance of a weather derivatives market and the growth potential of the European weather market.

Findings

Successful development of a Portuguese weather derivatives market will require three things. For the successful development of weather derivatives market, a legal and economic framework is needed, as well as the development of new weather products, training of qualified specialists for working with these instruments and attracting companies interested in hedging their profits. A combination of these factors will help growth and will accelerate the development of a weather derivatives market in Portugal.

Originality/value

The paper identifies some conditions that could allow the progress of the weather derivatives market in Portugal.

Details

The Journal of Risk Finance, vol. 11 no. 1
Type: Research Article
ISSN: 1526-5943

Keywords

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Article
Publication date: 2 February 2015

Manuela Ender and Ruyuan Zhang

The purpose of this paper is to analyze the efficiency of temperature-based weather derivatives (WD) in reducing risk exposure for Chinese agriculture industry. Therefore…

Abstract

Purpose

The purpose of this paper is to analyze the efficiency of temperature-based weather derivatives (WD) in reducing risk exposure for Chinese agriculture industry. Therefore, a put option with cumulated growing degree days as its underlying index is assumed to be bought by farmers as a risk management instrument to prevent income fluctuations from adverse temperature conditions.

Design/methodology/approach

The objective of this paper is to analyze the efficiency of temperature-based WD in reducing risk exposure for Chinese agriculture industry. Therefore, a put option with cumulated growing degree days as its underlying index is assumed to be bought by farmers as a risk management instrument to prevent income fluctuations from adverse temperature conditions.

Findings

The results of the efficiency tests show that temperature-based put options are efficient in offsetting yield shortfalls for rice and wheat in China. The weather-yield models have a high prediction power in explaining yield variation by temperature.

Research limitations/implications

The de-trending procedure for the weather-yield model should be improved to distinguish better between technology progress, human activities and influence of weather. Further, more advanced models could be used for the pricing.

Practical implications

The findings of the paper support the launch of WD as an efficient risk management tool for agriculture in China. Compared with traditional damage-based insurance, WD are more flexible, have lower transactions costs and avoid moral hazard or adverse selection.

Originality/value

The efficiency problem of WD has not been analyzed sufficiently worldwide and especially not for developing countries like China where a large proportion of the population works as farmers. This paper supports to fill this gap.

Details

China Agricultural Economic Review, vol. 7 no. 1
Type: Research Article
ISSN: 1756-137X

Keywords

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Article
Publication date: 1 January 2000

Don Ellithorpe and Scott Putnam

Major segments of the U.S. economy are affected by weather. With the emergence of weather derivatives, exposure to weather‐related risk has evolved from being merely…

Abstract

Major segments of the U.S. economy are affected by weather. With the emergence of weather derivatives, exposure to weather‐related risk has evolved from being merely accepted. As a result, weather risk management strategies are increasingly being adopted in strategic decision‐making by senior management. Weather derivatives enable managers to focus on core operating risks by trading away those business exposures related to temperature, precipitation, snow level, etc. These contracts offer a unique opportunity to discretely trade a new category of risk, which was previously considered to be an inevitable cost of doing business. This article describes the weather derivatives market and its contracts and outlines the principles of pricing and risk analysis in weather markets. In closing, the article discusses the application of these products for portfolio and business risk management using illustrative examples from the energy markets.

Details

The Journal of Risk Finance, vol. 1 no. 2
Type: Research Article
ISSN: 1526-5943

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