Weather Derivatives Pricing In Agricultural Risk Management

Quanzhou is the main production area of summer peanuts in Fujian Province and even the whole country.The output of peanuts in Quanzhou is greatly affected by weather conditions,especially in years with little rainfall.Peanut growth is reduced due to drought and water shortage,which directly affects local farmers Economic losses are very common.This article intends to design a weather-based derivative contract based on rainfall to provide Quanzhou peanut farmers with an agricultural risk management tool to help them hedge against the economic losses caused by drought-reduced summer peanuts.First,take the summer peanut production in Quanzhou from 1999 to 2018 as the sample data.The 5a moving average method was used to separate the trend yield and weather yield from the actual yield of summer peanuts.It was obtained that the actual yield and weather yield of summer peanuts in Quanzhou fluctuated in the same trend,which proved the correlation between the two.Secondly,using the weather yield model,it is concluded that the summer peanut yield is positively related to rainfall.For every 1% increase in rainfall,the actual yield will increase by 0.0216%.Third,the unit root test is performed on the rainfall series in Quanzhou from March 1989 to May-May(main summer water demand period).After proving that the series is stable,the autoregressive moving average model is used to measure Monthly rainfall forecast.As the decrease in rainfall is the main cause of losses,the cumulative rainfall put options are designed with the accumulated rainfall in March-May 2019 as the exercise price.Finally,historical analysis and distribution analysis are used to price cumulative rainfall put options.The pricing results show that the accumulated rainfall put option contract has a good hedging effect,which can help Quanzhou Xia Peanut farmers to hedge the economic losses caused by drought and reduced production.The design of the put-to-fall option not only enriches the types of contracts in the derivatives market,but also enables Quanzhou Xia peanut farmers to have an alternative financial instrument for agricultural risk management.