Abstract
The purpose of this paper is to test a temperature-based pricing model of Alaton (2002) in main rice-growing cities of Vietnam. The results of the test are then used for loss hedging analysis and policy implications for Vietnamese farmers, investors and related parties. Data are collected from General Statistics Office (GSO) of Vietnam, 2017 and Vietnam Meteorological and Hydrological Administration, with a reference to acuweather.com, on which the Alaton model is run. We suggest that temperature-based options are great tools for Vietnamese farmers to hedge unfavorable weather risks, and for investors to earn speculative profits. The great geographic diversity among Vietnam cities shows that there is a great potential to expand option contracts nationwide. By far, we acknowledge that findings are constrained by the limited temperature data in Vietnam, and the lack of comparable market prices. Furthermore, the pricing model itself assumes normal distribution, which might not fully capture the evolution of daily and seasonal temperature. Weather derivatives, especially the covered temperature-based options, are potential insurance for farmers and agricultural manufacturers besides existing price subsidiaries. From a policy perspective, the establishment of an active trading market can support the expanded use of weather derivatives within and outside the agriculture sector. Key words: derivatives, mean-reversion process, agricultural finance.
Highlights
Vietnamese farmers have been struggling to come up with better solutions to mitigate the effects of unfavorable weather patterns with several agricultural cities and provinces adopting new planting technology and receiving many government’s price subsidiaries and credit extension
While weather elements are uncorrelated with the equity market, they can be monitored by farmers in the production process
We expect that, owing to this easeof-use, even farmers with insufficient financial skill will find weather derivatives attractive enough to utilize them as risk hedging methods
Summary
Vietnamese farmers have been struggling to come up with better solutions to mitigate the effects of unfavorable weather patterns with several agricultural cities and provinces adopting new planting technology and receiving many government’s price subsidiaries and credit extension. Agriculture practice in the country is unique, that is, farmers grow their crops in small family paddy fields, unlike American or European farmers who have huge farms. Given this characteristic, we suggest that besides existing province-wide assistance, there is a need for alternative insurance contracts gearing towards individual farmers. We suggest that besides existing province-wide assistance, there is a need for alternative insurance contracts gearing towards individual farmers Such contracts will be able to allow farmers and manufacturers to actively hedge weather risks and have a trading market in order to avoid overpricing or price manipulation.
Sign-in/Register to view highlights & summary Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
