Weather swap as an instrument for weather risk management in wheat production

Abstract

A special type of weather derivatives are weather forwards and they exists mostly in the form of weather swaps. Hedging effectiveness in wheat production with and without weather swap was analyzed in this paper using stochastic dominance. The results show that the effect of risk reduction is significant using weather swap, but geographical- basis risk and production-related basis risk are important factor that reduce the utility of weather derivatives.

Keywords

• expected revenue
• wheat
• standard deviation
• stochastic dominance
• weather swap