Developing and pricing a rainfall contingent claims contract

Agricultural producers face many forms of uncertainty. Many of these uncertainties are the result of abnormal levels of precipitation. Contingent claims contracts based on an index of precipitation occurrences measured at an official weather station may provide a means of diversifying producers' risk portfolios.;The focus of this study is to investigate the requirements for pricing a contingent claims contract based on historical rainfall data. Emphasis is placed on establishing the expected loss cost for the contract. Standard insurance pricing methods refer to expected loss cost as the break-even premium rate.;Break-even premium rates are estimated through simulation by both non-parametric and parametric procedures for three different agricultural situations.