Agricultural Applications Of Weather Derivatives

Abstract

Weather derivatives are currently a fast growing derivatives sector. The purpose of this article is to examine the background of the weather derivatives market and some of its benefits for agricultural risk management. In addition, this article is meant to serve as an overview of the benefits and uses of weather derivatives for those who may not be otherwise exposed to this type of market. This article examines the structure of Heating Degree Day and Cooling Degree Day contracts along with agricultural hedging uses of weather derivatives, notably, a use unique in this market, hedging of volumetric risk.