SYSTEMIC MONSOON RISK AND RAINFALL INDEX FUTURES: STRATEGIES FOR RISK ABSORPTION
DOI:
https://doi.org/10.5281/zenodo.17423903Keywords:
Rainfall Index Based Future, Excess Rainfall Days, Deficit Rainfall Days, Basis Risk, Rainfall risk markets.Abstract
Purpose: The purpose of this paper is to analyse the application and uniqueness of rainfall index-based futures for mitigating rainfall risk which impacts various segments of the economy including agriculture, banking & insurance, agro-processing, and power generation.
Design/Methodology/Approach: Research studies have shown that traditional insurance markets are unable to address the problem of rainfall risk adequately. There is need for a versatile financial tool to effectively absorb the rainfall risk.
Findings: The structure of Rainfall Futures Contract is presented using standard metrics as Excess Rainfall Days (ERDs) and Deficit Rainfall Days (DRDs).
Practical implications: The importance of basis risk in evaluating the feasibility and effectiveness of rainfall index-based futures is examined.
Originality value: Rainfall index-based futures represent an innovative financial product introduced by Chicago Mercantile Exchange.
