Weather Derivatives in the Wine Industry

Bocconi University Working Paper

29 Pages Posted: 27 Jun 2008 Last revised: 8 Sep 2009

See all articles by Claudio Zara

Claudio Zara

Bocconi University - Department of Finance; GREEN Research Centre - Bocconi University

Multiple version iconThere are 2 versions of this paper

Date Written: May 1, 2008

Abstract

The wine industry is very sensitive to climate risk, mainly due to the grape crop. Industry players usually cover this risk through single-peril and multi-peril crop insurance policies. Insurance policies pose many problems of efficiency, as pointed out in the literature, and do not usually cover the temperature risk. The aim of this paper is to understand whether weather derivatives, mainly developed for the energy industry, can also be useful to cover temperature risk for the wine industry. I have discovered that a weather derivative useful for this task is similar to a cooling degree day (CDD) contract in the energy industry, and that a possible hedging strategy is a straddle consisting of combination of a call and a put on a suitable temperature index. In the case history presented, relating to the DOC Oltrep-Pavese (OP) Bonarda red grape, the straddle covers the temperature risk effectively, although it is unable to reduce volatility related to the crop economic value.

Keywords: weather derivatives, temperature risk, corporate risk management, wine industry

JEL Classification: G20, G30, L66, M10

Suggested Citation

Zara, Claudio, Weather Derivatives in the Wine Industry (May 1, 2008). Bocconi University Working Paper, Available at SSRN: https://ssrn.com/abstract=1152213 or http://dx.doi.org/10.2139/ssrn.1152213

Claudio Zara (Contact Author)

Bocconi University - Department of Finance ( email )

Via Roentgen 1
Milano, MI 20136
Italy

GREEN Research Centre - Bocconi University ( email )

via Roetgen 1
Milano, Milano 20136
Italy

HOME PAGE: http://https://www.green.unibocconi.eu/wps/wcm/connect/cdr/green/home/

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