Weather-based instruments in the context of whole farm risk management
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Recent and presumable future developments tend to increase the risks associated with farming
activities. These include climate risks which have always played an important role in farming.
Weather based instruments can be valuable tools to reduce the risk associate with unfavourable
climatic events. However, a number of factors can limit the hedging effectiveness
of these tools. These factors include basis risk, the impacts of remaining price uncertainty and
diversification effects. The paper addresses the influence of each of these factors. In its final
part an integrated approach for a comprehensive assessment of weather derivatives and other
hedging instruments is proposed that is based on the concept of portfolio optimisation.