Design Of Rainfall Index Derivatives Contract And Application Research Of Agricultural Weather Risks

As basic industry which relates to China’s economic and social development, Agriculture is faced with agricultural risks because of its regional, seasonal and cyclical characteristics and the specialty of production process. Among them, the impact of climate change on agricultural production in China is very significant, and droughts and floods are two kinds of hazard factors.In order to deal with the risk of agriculture, agricultural insurance was launched in recent years and developed rapidly. But there are also some frequent problems, not only the business cost is high, but also facing the risk that farmers of adverse selection and moral hazard. All these problems result in the rapid decline of the agricultural insurance market.Weather derivatives is an innovation tool for general weather risk management with good prospects for development. The main focus of foreign research is on pricing model and the temperature index of contract. There is neither weather derivatives transactions nor the development of weather derivatives yet in China. To research on financial instruments such as weather derivatives for risk management has great significance for the development of agriculture.Among all kinds of agricultural risks which influence the production of wheat, the daily precipitation which is closely related with the drought and flooding rainfall is one of the main factors affecting wheat yield. Based on the study of weather derivatives, we select daily precipitation data and wheat production data of1980-2011in Zhumadian city. Henan Province. We use a linear sliding average method to separate the wheat yield into trend yield and fluctuated yield, the yield fluctuation is mainly influenced by various climate factors. On this basis, we use Musshoff (2011) model of rainfall probes to check out the relationship between rainfall and winter wheat yield, and try to build a cumulative rainfall index and insufficient rainfall index derivatives contracts.The results show that trend yield shows a rising trend, due to the improvement of social productivity. Average climate yield in1980-2011of Zhumadian is about31.50kg/ha, up to a maximum of976.67kg/ha while the minimum value is-1545.94kg/ha. In most years, the average climate yield concentrated in-500～500kg/ha, the similar curve of the actrual yield and climate yield shows that the meteorological conditions is the main reason causing yield annual discontinuous variation. There exists a linear correlation between the precipitation and the wheat yield. We can find that the statistical period of rainfall3-5month passed the significant test at1.5%level, and the model fitting degree is0.43which is the highest in all the statistical period. The result indicates that the relationship between the accumulative rainfall of March. April and May and winter wheat yield is explained well by the production function. Statistics for a period of March, April and May of inadequate rainfall also passed the test at0.4%level of significance, and the model fitting degree is0.54, the regression coefficient is15.42.This paper selects the cumulative rainfall index and insufficient rainfall index of March, April and May and design two kinds of put option. In the beginning of the period of contract, farmers can choose to buy the cumulative rainfall index or insufficient rainfall index put option. The strike level of cumulative rainfall index contract is156.6mm and the tick size is70.9yuan per bit while the strike level of insufficient rainfall index contract is-208.4mm and the tick size of it is154.2yuan per bit. Using rainfall index derivatives can hedge risks effectively in wheat production.