AAWE, Economics Dept, New York University, 19 W 4th St, 6Fl., New York NY 10012aawe@wine-economics.org

AAWE Working Paper No. 5

 

Identification of Stochastic Processes for an Estimated Icewine Temperature Hedging Variable

Don Cyr and Martin Kusy

Introduction

Weather derivatives represent a relatively new form of financial security with payoffs contingent on weather indices based on climatic factors. These contracts provide firms with the ability to manage unforeseen climatic changes that create risk in terms of the variability of earnings and costs. The potential for their use in a wide variety of industries is great as it has been estimated that approximately one-seventh of the industrialized economy is weather sensitive (Hanley, 1999). A recent survey for example, conducted by the U.S. Department of Commerce in 2004 estimates that approximately 30% of the total GDP of the United States is exposed to some type and degree of weather risk (Finnegan, 2005). A brief listing of affected industries includes not only agriculture and utilities but also the entertainment industry, beverage, construction and apparel industries.

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