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The author through this
paper, brings out the importance of weather derivative to mitigate the
agriculture risk factors and also in terms of cost saving and market
transparency. A financial weather contract is an instrument used by an
individual or a company to insure against the risk of unforeseen weather
condition. It is of two type; Weather Derivative (WD) and Weather Insurance
(WI).

If a company’s revenue is
affected by the temperature, sunshine or snowfall, it can reduce the loss with
the help of weather derivatives. The author explains this with a help of an
example; a golf course owner might want to reduce the risk of revenue loss
during the rainy days. The first weather derivative index was Heating Degree
Day (HDD) index in relation to winter temperature risk and Cooling Degree Day (CDD)
in relation to summer temperature risk. It was introduced to correlate temperature
and revenue fluctuations.

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The scope of weather
derivate is expanding with the availability of adequate weather reports and statistics
as many developed and developing countries have extensive and reliable data on
weather.  The pricing of WDs is very different
from that of the ordinary commodity or financial derivative. As in case of WDs
there are no underlying traded assets. In the absence of tradable asset there are
absolutely no possible chances of developing weather futures contract.  The pricing model for these is based on actuarial
calculations.  There is a lack of market
transparency and increased cost of transaction in the absence of universal
pricing mechanism.

Technology plays an
important role in transmitting the information globally.  Many agriculture deals already use the vegetative
index to as insurance triggers. Soil humidity measure, which is vital for plant
growth is now shown directly on the traders screen. These hi-tech equipments
not only help farmers in greater production but also help the investors in making
analyzed investments.

 The author further gives an elaborate example of
Rainfall Index Derivatives used in Morocco. He draws a relation between weather
factor and specific factor. Through this he tries to lay emphasis as how
different crops require different amount of rainfall. He also analysis the
performance of weighted rainfall index. 

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