Weather derivatives: Concept and application for their use in South Africa

Recent innovations in energy markets suggest the possibility of addressing agricultural risk factors by issuing derivatives on weather elements. Such instruments appear particularly attractive, as asymmetric information and loss adjustment issues do not affect them. This article first describes the concept, functioning and application of weather derivatives. It then examines the feasibility of rainfall derivatives to manage agricultural production risk in South Africa by evaluating the merits of rainfall options, and suggesting an option strategy, as a yield risk management tool. The use of rainfall derivatives in South Africa is likely to increase in future as capital markets, financial institutions, insurance companies, crop insurance companies and hedge funds collectively organize themselves to share and distribute weather risks.

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Journal Article
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Agrekon, Issue 4
Volume 43
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 Record created 2017-04-01, last modified 2018-01-22

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