Todor Markovic

The possibility of drought risk reduction in corn production.

Weather derivatives are contemporary instruments for insurance risk of drought in agricultural production. Corn production is particularly sensitive to this risk, and the amount of the yield of this crop is in significant correlation with the July-August rainfall amount. Oscillations of production output, caused by the risk of drought, are reflected directly on the fluctuations of the financial result. The application of weather derivatives may decrease the variability of the mentioned economic parameter in corn production. In the investigated example of corn production, simulating the application of the weather option the coefficient of variation of realized financial results decreased by 9.64% compared to the version without the insured risk. At the same time, using the analysed insurance instrument, the risk of achieving a negative financial result is eliminated.

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

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.