Post by Sapphire Capital on Oct 3, 2008 11:57:19 GMT 4
Indifference Pricing of Weather Derivatives
Wei Xu
Martin Odening
Oliver Musshoff
Humboldt University of Berlin - Department of Agricultural Economics and Social Sciences
American Journal of Agricultural Economics, Vol. 90, No. 4, pp. 979-993, November 2008
Abstract:
Weather derivatives are difficult to price due to the nontradability of weather and the absence of liquid secondary markets for these contracts. We use the concept of indifference pricing to develop a model for calculating the willingness to pay for weather insurance. Compared with other approaches, indifference pricing is less ambitious since it does not attempt to predict a transacted market price. The application of indifference pricing in the case of German crop producers shows that their willingness to pay for weather insurance depends on the production program and varies regionally. This suggests the development of tailored insurance products.
papers.ssrn.com/sol3/papers.cfm?abstract_id=1263053
Wei Xu
Martin Odening
Oliver Musshoff
Humboldt University of Berlin - Department of Agricultural Economics and Social Sciences
American Journal of Agricultural Economics, Vol. 90, No. 4, pp. 979-993, November 2008
Abstract:
Weather derivatives are difficult to price due to the nontradability of weather and the absence of liquid secondary markets for these contracts. We use the concept of indifference pricing to develop a model for calculating the willingness to pay for weather insurance. Compared with other approaches, indifference pricing is less ambitious since it does not attempt to predict a transacted market price. The application of indifference pricing in the case of German crop producers shows that their willingness to pay for weather insurance depends on the production program and varies regionally. This suggests the development of tailored insurance products.
papers.ssrn.com/sol3/papers.cfm?abstract_id=1263053