Weather Derivatives Structuring and Pricing: Evidence from an Agricultural Sustainable Aid in Africa
20 Pages Posted: 5 Nov 2012
Date Written: April 2012
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
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