Hedging of crop harvest with derivatives on temperature

Abstract

This article studies hedging strategies of crop harvest with futures and options on indexes of cumulated average temperatures (CAT). To account for the time and space dependence, temperatures and crop yields are modeled by three dimensions Gaussian elds. In this framework, we study the features and dynamics of CAT futures and CAT basket options. Next, we nd the portfolio of CAT futures minimizing the variance of incomes from crop in dierent regions. We compare this hedging strategy to the portfolio maximizing the expected exponential utility of incomes. Furthermore, we assess the impact of CAT basket options on the variance of crop incomes. We conclude this work by a realistic case study in which the harvest of green maize in two Belgian regions is hedged against adverse deviations of temperatures with CAT futures or options.

An Actuarial Pricing Method for Air Quality Index Options

“…Moon and Son [27] took the natural gas industry as an example to illustrate the advantages of using weather derivatives and the requirements for using such derivatives. Hainaut [28] used two weather derivatives (futures and options) based on a cumulative average temperature index to hedge against temperature risks.…”