An Empirical Analysis of Weather Risk Management in Agricultural Sector Feasibility Study Of Weather Derivatives As An Alternative Tool To Hedge Weather Risk In Gwalior Chambal Region

Abstract

The monsoon rainfall volatility is one of the major reasons for income loss for farmers. This study shows that there is significant variation in rainfall volatility across Gwalior Chambal region and it has increased significantly in recent past. This signifies the need of efficient risk hedging instrument. The rainfall index developed in this study can be used for trading of rainfall derivatives in Gwalior-Chambal region and the same method can be used to develop rainfall index for other parts of India. The rainfall index developed in this study is proved to be a potentially distinct asset class and can be used to rainfall derivative trading. The study shows the huge acceptability of rainfall derivatives among the farmers for hedging rainfall risk. We have developed the pricing model for rainfall derivatives contracts in Gwalior-Chambal region which used farmer s readiness to pay as input. The combination of rainfall index and price model proposed in this study will be very useful to introduce the rainfall derivative contracts in Gwalior-Chambal region. Rainfall derivatives will solve the problem of farmers to hedge their rainfall risk and also reduce the burden of government. newline