Abstract:

Temperature derivatives is mainly utilized to reduce or avoid the potential risks to agriculture and related industries from severe weather. The study calculated the temperature index, as the underlying of temperature derivatives, and soybean meteorological yield income respectively based on 65 county−level daily temperatures and soybean yield data from 1980 to 2020 in Heilongjiang province. Then the optimal hedging strategies for exchange−traded temperature derivatives were constructed for the 65 samples, which were evaluated using two financial risk indicators of value at risk (VaR) and expected shortfall (ES) to assess the potential effects of temperature derivatives in managing weather risk in Heilongjiang's soybean industry. The results showed that after the use of temperature derivatives, VaR improved by 17.63% to 63.78% and ES improved by 12.66% to 43.64% for the 65 samples, for an average improvement of 38.91% and 29.24%, respectively. The contract months for optimal hedging strategy were concentrated in July and September, especially concentrated in September for the optimal of expected shortfall. The results indicated that the use of temperature derivatives could significantly transfer the weather risk of soybean cultivation in Heilongjiang, with the risk months being mainly July and September, and the severe low−temperature risk in September, which was in line with the fact that soybean in Heilongjiang is vulnerable to cold damage in July and frost damage in September, the latter of which usually leads to severe loss of yield.

Key words: Weather derivatives, Hedge strategy, Soybean, Financial meteorology