Monsoon Risk Securitisation: Monsoon Options on Select MET Subdivisions

Abstract

Amberite nature of monsoons is a major source of risk adversely impacting the Indian economy. Insurance markets are not developed to absorb the monsoon shocks. Relief packaging, the traditional tool of handling monsoon disasters, proved to be inadequate and ineffective. The possibility of engaging capital markets for absorbing the systemic monsoon risk needs to be explored. In this paper an attempt has been made to develop a conceptual framework for securitising monsoon risk via monsoon options. The monsoon options could serve as special purpose vehicles facilitating transfer of systemic monsoon risk to capital markets. The generic formulation of monsoon options is tried by defining the underlying variable in terms of Millimeter Rainy Days (MRDs). The basic MRD call and put option structures are defined. Further, the problem of pricing monsoon derivatives is analysed. For this purpose historical data (covering a period of 50 years, i.e., 1954-2003) relating to a sample of selected meteorological subdivisions of India is considered.

Keywords: Monsoon, Monsoon Risk , Monsoon Hedging, Monsoon Derivatives , Rainfall-Index insurance, Millimeter Rainy Days (MRDs)