Rainfall Index Based Futures: A Tool for Absorbing Systemic Monsoon Risk

Mr. Dileep N, Dr. G. Kotreshwar
International Journal of Finance, Insurance and Risk Management, Volume 13, Issue 1, 79-87, 2023
DOI: 10.35808/ijfirm/343


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.

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