Climatic changes and weather risk management in agriculture

Abstract

Despite the constant development of the system of forecasting unpredicted events and risks, there are many economic sectors where revenues depend directly on the wheather variables. Risk management is a continuous process whose goals are to predict and stabilize cash flows and maximize profit of a company. Weather derivatives are special form of financial risk transfer instruments and they are associated with specific weather events or conditions that directly or indirectly affect the third party outcomes. Unlike traditional insurance contracts, weather derivatives are realized when the agreed time variable exceeds a predefined value for a specific period. Therefore, financial derivatives make more probable the uncertainty of future operations in terms of present actions. Market for the weather derivatives is the youngest and also the fastest growing market for financial derivatives. Insurance against weather risk primarily was applied in the energy sector. Market development and the ability to trade with weather derivatives, enabled the development of new types of weather derivatives offered to companies. These new types of derivatives provide protection not only from changes in temperature, but also from rainfall, wind intensity, humidity and pressure, cloudiness, snow melting, sea temperature, wave height etc. This paper presents a definition, classification and historical development of weather derivatives. The aim is to emphasize characteristics of this type of derivatives and their distinctive features related to weather conditions and variables. In this paper the focus is on weather derivatives used by agriculture industry whose results of operations mainly depend on weather variables.

Keywords

• weather derivatives
• risk management
• weather variables
• hedging