Review of Professional Management- A Journal of New Delhi Institute of Management

Open Access Open Access  Restricted Access Subscription Access

Hedging Weather and Catastrophe Risks using Commodity Futures as Weather Derivatives in India


Affiliations
1 Assistant Professor, Department of Commerce, Madras Christian College, East Tambaram, Chennai, Tamilnadu, India
 

Indian Businesses are exposed to various kinds of risks such as interest rates, exchange rates, unexpected changes in the domestic economic conditions, international economic conditions and various intervening risks. Unexpected changes and business risks arising out of those have capabilities to threaten the very survival of businesses in India. Often these risks are related to the financial markets and to hedge against these risks, financial markets have developed new instruments called financial derivatives. For more than a decade, these financial derivatives have been helping the corporate world in India to hedge against various unexpected changes in the business environment but does not offer solutions to risks caused due to changes in the climatic conditions and other natural calamities. Identifying the need to protect themselves against these adverse weather conditions, developed nations like United States and United Kingdom developed weather derivative contracts to hedge against these risks. However, India has not developed such instruments to hedge against weather risks and commodity futures are being used to hedge against these losses or often these risks are covered by insurance policies. This research paper analyses predictability of some select future commodity prices on the basis of volumes and values of contracts. This will enable us to know how derivative markets can be used to hedge against losses due to adverse weather conditions.

Keywords

Adverse Climatic Conditions, Commodity Futures, Financial Derivatives, Financial Risks, Weather Derivatives.
User
Notifications
Font Size

  • Alaton P., Djehiche B. and Stillberger D. (2002), On Modelling and Pricing Weather Derivatives, Applied Mathematical Finance, 9(1), 1-20.

  • Anjali, Choksi., (2012), Emergence of weather derivatives-feasibility in Indian context,Zenith International Journal of Business Economics & Management Research. Vol. 2 Issue 5, May 2012, ISSN 2249 8826 pp 139-152.

  • Bhaskaran, R.,(2004). Weather Derivatives. Treasury Management Magazine at https://www.iupindia.in/304/TM_Weather_Derivatives_49.html

  • Benth, Fred & Saltyte Benth, Jurate. (2011). Weather Derivatives and Stochastic Modelling of Temperature. International Journal of Stochastic Analysis, Article ID 576791, 21 pages doi:10.1155/2011/576791

  • Golden, L. L., Wang, M. and Yang, C. C. (2007). Handling Weather Related Risks through the Financial Markets: Considerations of Credit Risk, Basis Risk, and Hedging. Journal of Risk and Insurance. 74(2); 319-346 at https://doi.org/10.1111/j.1539-6975.2007.00215.x

  • Gowtham Ramkumar (2018). A Study on challenges in bringing weather derivatives in India, Conference proceedings of International Conference on Economic transformation with inclusive growth, ISBN: 978-81-929777-9-9.

  • Linneischolar_mainh-Bayer, Joanne & Mechler, Reinhard. (2011). Insurance against Losses from Natural Disasters in Developing Countries. Journal of Integrated Disaster Risk Management. 1(1); 59-81 at doi: 10.5595/idrim.2011.0013

  • Moreno, M., (2002), Rain Risk, Research Paper, Speedwell Weather Derivatives, London.

  • Shivkumar, D.P., Kotreshwar,G. (2013), Trading in weather risk transfer productsReengineering rainfall indexation, International Journal of Business and Management Invention, 2( 11) ; 33-41, ISSN : 2319–8028

  • Skees, J.R, Gober, S., Varangis, P., Lester, R., and Kalavakonda, V.,(2001). Developing rainfall-based index insurance in Morocco, Policy research working paper, World Bank, ISSN: 1813-9450.

  • Yang, C. C., Brocket, P. L. and Wen, M. M (2009). Basis Risk and Hedging Efficiency of Weather derivative. The Journal of Risk Finance,10(5); 517-536, https://doi.org/10.1108/15265940911001411

  • Wang, H.H., & Ke, B. (2005). Efficiency tests of agrocultural commodity futures in China. Austrialian Journal of Agricultural and Resources Economics, 49(2), 125-141.


Abstract Views: 216

PDF Views: 143




  • Hedging Weather and Catastrophe Risks using Commodity Futures as Weather Derivatives in India

Abstract Views: 216  |  PDF Views: 143

Authors

Gowtham Ramkumar
Assistant Professor, Department of Commerce, Madras Christian College, East Tambaram, Chennai, Tamilnadu, India

Abstract


Indian Businesses are exposed to various kinds of risks such as interest rates, exchange rates, unexpected changes in the domestic economic conditions, international economic conditions and various intervening risks. Unexpected changes and business risks arising out of those have capabilities to threaten the very survival of businesses in India. Often these risks are related to the financial markets and to hedge against these risks, financial markets have developed new instruments called financial derivatives. For more than a decade, these financial derivatives have been helping the corporate world in India to hedge against various unexpected changes in the business environment but does not offer solutions to risks caused due to changes in the climatic conditions and other natural calamities. Identifying the need to protect themselves against these adverse weather conditions, developed nations like United States and United Kingdom developed weather derivative contracts to hedge against these risks. However, India has not developed such instruments to hedge against weather risks and commodity futures are being used to hedge against these losses or often these risks are covered by insurance policies. This research paper analyses predictability of some select future commodity prices on the basis of volumes and values of contracts. This will enable us to know how derivative markets can be used to hedge against losses due to adverse weather conditions.

Keywords


Adverse Climatic Conditions, Commodity Futures, Financial Derivatives, Financial Risks, Weather Derivatives.

References





DOI: https://doi.org/10.20968/rpm%2F2019%2Fv17%2Fi1%2F145650