A new approach & model for weather derivative instrument based on water table for floods, droughts and rainfall

Natural and man-made catastrophes have always made man look for avenues to hedge risks and reduce losses. The insurance sector emerged as a consequence of these needs. A derivative not only provides for what an insurance instrument does cover, but also brings in more options to the hands of the user...

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Bibliographic Details
Published in:Finance India 2002-09, Vol.16 (3), p.877
Main Author: Agarwal, Aman
Format: Article
Language:English
Subjects:
Cash flow
Derivatives
Energy industry
Floods
Globalization
Hedging
Liberalization
Options markets
Precipitation
Profits
Property & casualty insurance
Rain
Risk management
Studies
Taxation
Water supply
Weather
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Summary:Natural and man-made catastrophes have always made man look for avenues to hedge risks and reduce losses. The insurance sector emerged as a consequence of these needs. A derivative not only provides for what an insurance instrument does cover, but also brings in more options to the hands of the user such as trade feasibility and more flexibility. The market for weather derivatives instruments (WDI) was initiated 4 years back, with WDI based on temperature embedded in energy contracts. It has flourished and grown since then. In this paper, the idea of WDI based on water table as the underlying value is developed. The instrument proposed is primarily for hedging risks against floods, droughts, rainfall and crop yields. Apart from the model, the instruments functioning, marketing mechanisms, trading possibilities, accounting and taxation aspects of WDIs are highlighted. The model also provides for usage of water table as a medium for hedging risk against environmental hazards which are quantifiable via water table movements.
ISSN:0970-3772