Put, call or strangle? About the challenges in designing weather index insurances to hedge performance risk in agriculture

Due to an expected increase of extreme weather events caused by climate change, weather index insurances (WII), which can be used to hedge weather-related income fluctuations, are shifting into the spotlight. Most previous studies focus on the index design as it is an important part of a weather index insurance. Nevertheless, also of main importance is the general contract structure. This holds especially true for farms in regions, which are not characterized by extreme climatic conditions. In the present study, it is investigated whether precipitation and soil moisture index based put- and call-options as well as strangles reduce the volatility of total gross margins (hedging efficiency) of 20 German farms in regions with moderate natural conditions. In particular, the hedging efficiency of standardized and customized WII are analyzed. It could be found that customized contracts are better suitable to reduce performance risk than standardized contracts. Further, although the hedging efficiency varies considerably from farm to farm and depends highly on the contract type, the analyzed customized call-options and strangles clearly outperform the customized put-options.

Issue Date:
Aug 15 2017
Publication Type:
Conference Paper/ Presentation
Record Identifier:
Total Pages:

 Record created 2017-08-17, last modified 2018-01-23

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