DEVELOPING AND PRICING PRECIPITATION INSURANCE
By: Martin, Steven W.; Barnett, Barry J.; Coble, Keith H.
Martin, Steven W.; Barnett, Barry J.; Coble, Keith H., DEVELOPING AND PRICING PRECIPITATION INSURANCE, Journal of Agricultural and Resource Economics, Volume 26, Issue 1, July 2001, Pages 261-274
Production agriculture and agribusiness are exposed to many weather-related risks. Recent years have seen the emergence of an increased interest in weather-based derivatives as mechanisms for sharing risks due to weather phenomena. In this study, a unique precipitation derivative is proposed that allows the purchaser to specify the parameters of the idemnity function. Pricing methods are presented in the context of a cotton harvest example from Mississippi. Our findings show a potential for weather derivatives to serve niche markets within U.S. agriculture.