| To help farmers reduce their risk of income loss caused by drought, we introduce a new financial weather derivative called a drought option. We model and estimate drought option contract prices based on existing techniques used in temperature and precipitation option pricing.;Comparing the three evaluation methods, we attempt to determine which one is more reasonable for data with different lengths and different parameters in the contract.;Keywords. Drought option prices, reconnaissance drought index, potential evapotranspiration, goodness-of-fit test, mean-reverting process, daily temperature simulation, speed of monthly rainfall simulation.;The difference is, unlike the direct measure of temperature or precipitation, we need to find a index which can reflect the severity of drought in some long time period. Then we use historical burn analysis, index value simulation and daily value simulation to estimate the value of the contract based on data in dry regions in China. |
