Weather Derivatives Structuring and Pricing: Evidence from an Agricultural Sustainable Aid in Africa

20 Pages Posted: 22 Feb 2012 Last revised: 23 Feb 2012

See all articles by Lamya Kermiche

Lamya Kermiche

Grenoble Ecole de Management

Nicolas Vuillermet

affiliation not provided to SSRN

Multiple version iconThere are 2 versions of this paper

Date Written: January 30, 2012

Abstract

The main objective of this article is to calculate the price of weather derivatives for different African countries with payout depending on temperature. A new approach of computing degree day contracts is shown and gives another scale to the numerical relevance and practical implementation of the findings. With actual historical data for each country, we determine a stochastic process based on continuous time with mean reversion representing the evolution of the temperature. Focusing on the Monte-Carlo simulation method, we present the price of risk for each contract and the potential implications to solve several aspects of the African economy.

Keywords: weather derivatives, degree day contract, mean-reversion, Monte-Carlo simulation, hedging African weather risk

JEL Classification: G13

Suggested Citation

Kermiche, Lamya and Vuillermet, Nicolas, Weather Derivatives Structuring and Pricing: Evidence from an Agricultural Sustainable Aid in Africa (January 30, 2012). Available at SSRN: https://ssrn.com/abstract=2009270 or http://dx.doi.org/10.2139/ssrn.2009270

Lamya Kermiche (Contact Author)

Grenoble Ecole de Management ( email )

12 Rue Pierre Semard
Grenoble, Cedex 01 38000
France

Nicolas Vuillermet

affiliation not provided to SSRN ( email )

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