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Abstract

This paper examines the feasibility of weather derivatives in the South African agricultural context by evaluating the merit of rainfall options as a yield risk management tool. The paper consists of three distinctive parts. In the first part we introduce weather derivatives and supply a basic overview of the functioning and uses of weather derivatives in general and rainfall options specifically. Next we examine the South African maize industry and draw conclusions from the influence of rainfall on maize crop yields. The purpose of this section is to determine the feasibility and necessity of yield hedging mechanism. We conclude the paper by combining the first two sections into a workable recommendation strategy for the implementation of rainfall derivatives as a hedge against yield risk caused by adverse rainfall conditions.

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