Rainfall Derivatives and Risk Management in the Wine Sector

Abstract

Since their first introduction in 1996, weather derivatives have been a topic of discussion. The ongoing climate change has, in fact, increased the risks for companies that are naturally exposed to meteorological variables, raising questions on how such companies should manage these increasingly significant risks. The wine sector is one of the most exposed to these risks, including rainfall risk. The purpose of this work is to evaluate the use of rainfall derivatives to create a strategy for managing rainfall risk. For this purpose, both put and call options are implemented. The pricing is carried out by Monte Carlo simulations, based on a model capable of simulating daily rain. Then, rainfall derivatives are applied to the Italian wine regions of the province of Trento and of Franciacorta, and an assessment of the profitability of companies purchasing such derivatives is made to understand their effectiveness in reducing rainfall risk.