CONCEPT OF WEATHER DERIVATIVES
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- Weather derivatives are financial instruments that can be used
as part of a risk management strategy to reduce risk associated
with unexpected & adverse weather conditions.
- Weather derivatives derive their value from various climatic
conditions like rainfall, temperature, snowfall or hurricanes.
- Weather derivatives are index-based instruments that usually
use observed weather data at a weather station to create an index
on which a payout can be based. Example - This index could be the
number where the minimum temperature falls below zero which might
be relevant for a farmer protecting against frost damage.
Case for the introduction of weather derivative in Ghana
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- In Ghana, agriculture represents 36 % of the country’s GDP and
is the main source of income for 60 % population.
- Agricultural production depends a lot on weather parameters
like rainfall and temperature
- If weather derivatives are introduced in Ghana, Ghanian farmers
will be able to use weather derivatives to hedge against poor
harvests caused by failing rains during the growing period,
excessive rain during harvesting, high winds in case of
plantations.
- Their overall loss in agriculture(if it happens) will be
minimised to a great extent in exchange of a relatively smaller
premium.
- Farmers shift their agricultural loss to seller of weather
derivative. Hence, weather derivatives will be of huge benefit to
Ghanian farmers so should be introduced.