Weather derivatives: risk‐hedging prospects for agriculture and power sectors in India

Abstract

Abstract Purpose – This article aims to examine the state of risk management in agriculture and power sector of India, evaluate the effectiveness of weather derivatives as alternative risk management tools and basic framework required to implement them. Design/methodology/approach – Applications of traditional risk‐hedging tools and techniques in Indian agricultural and power sectors have proved to be costly, inadequate, and more importantly, a drag on the country's fiscal system. Mostly they offer a hedge against only the price risk. The volume related risk, which is rather more serious and highly weather‐dependent, remains practically unhedged. This study has used existing literature and empirical evidences for analyzing the various issues related to risk management in agriculture and power sector. Traditional derivative strategies have been used to construct weather derivatives contracts with different underlying weather indices. Findings – The article suggests that how an appropriate weather‐based derivative contract system may be a more flexible, economical and sustainable way of managing the volume‐related weather risk in an economy, like India, having predominant agricultural and power sectors. Originality/value – The article will be of value to all those who have some stakes in agricultural and power sectors of an economy and would like to mange the volume related risk in these sectors.

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