Spatially-Aggregated Temperature Derivatives: Agricultural Risk Management in China

• Main Authors: Lu Zong, Manuela Ender
• Format: Article
• Language: English
• Published: MDPI AG 2016-09-01
• Series: International Journal of Financial Studies
• Subjects: agriculture; growth degree-day; risk management; weather derivatives
• Online Access: http://www.mdpi.com/2227-7072/4/3/17

In this paper, a new form of weather derivative contract, namely the climatic zone-based growth degree-day (GDD) contract, is introduced. The objective is to increase the risk management efficiency in the agricultural sector of China and to reduce the model dimension of multi-regional temperature-based weather derivatives pricing. Since the proposed contract serves as a risk management tool for all of the cities in the same climatic zone, we compare the risk hedging power between the climatic zone-based and the city-based GDD contracts. As a result, we find that the differences between the two types of temperature-based weather contracts are maintained within a certain range.