Rainfall Index Based Futures: A Tool for Absorbing Systemic Monsoon Risk
Purpose: The purpose of this paper is to analyse the application and uniqueness of rainfall index-based futures for mitigating rainfall risk which impacts various segments of the economy including agriculture, banking & insurance, agro-processing, and power generation. Design/Methodology/Approach: Research studies have shown that traditional insurance markets are unable to address the problem of rainfall risk adequately. There is need for a versatile financial tool to effectively absorb the rainfall risk. Findings: The structure of Rainfall Futures Contract is presented using standard metrics as Excess Rainfall Days (ERDs) and Deficit Rainfall Days (DRDs). Practical implications: The importance of basis risk in evaluating the feasibility and effectiveness of rainfall index-based futures is examined. Originality value: Rainfall index-based futures represent an innovative financial product introduced by Chicago Mercantile Exchange.