Hostname: page-component-586b7cd67f-2brh9 Total loading time: 0 Render date: 2024-11-24T12:03:22.577Z Has data issue: false hasContentIssue false
  • English
  • Français

Canadian Ice Wine Production: A Case for the Use of Weather Derivatives*

Published online by Cambridge University Press:  08 June 2012

Don Cyr  and
Martin Kusy
Don Cyr
Affiliation:
Department of Finance, Operations and Information Systems, Faculty of Business,Brock University, 500 Glenridge Avenue, St. Catharines, Ontario,Canada L2S 3A1, Tel: 905–688–5550 (ext 3136), e-mail: [email protected]
Martin Kusy
Affiliation:
Department of Finance, Operations and Information Systems, Faculty of Business,Brock University, Brock University, 500 Glenridge Avenue, St. Catharines, Ontario, CanadaL2S 3A1.
Get access Rights & Permissions [Opens in a new window]

Abstract

Weather derivatives are a relatively new form of financial security that can provide firms with the ability to hedge against the impact of weather related risks to their activities. Participants in the energy industry have employed standardized weather contracts trading on organized exchanges since 1999 and the interest in non-standardized contracts for specialized weather related risks is growing at an increasing rate. The purpose of this paper is to examine the potential use of weather derivatives to hedge against temperature related risks in Canadian ice wine production. Specifically we examine historical data for the Niagara region of the province of Ontario, Canada, the largest icewine producing region of the world, to determine an appropriate underlying variable for the design of an option contact that could be employed by icewine producers. Employing monte carlo simulation we derive a range of benchmark option values based upon varying assumptions regarding the stochastic process for an underlying temperature variable. The results show that such option contracts can provide valuable hedging opportunities for producers, given the historical seasonal temperature variations in the region. (JEL Classification: G13, G32, Q14, Q51, Q54)

Type
Articles
Information
Journal of Wine Economics , Volume 2 , Issue 2 , Fall 2007 , pp. 145 - 167
Copyright
Copyright © American Association of Wine Economists 2007

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Ait-Sahalia, Y. (2004) Disentangling diffusion from jumps. Journal of Financial Economics, 74, 487–528.CrossRefGoogle Scholar
Alaton, P., Djehiche, B. and Stillberger, D. (2002). On modelling and pricing weather derivatives. Applied Mathematical Finance, 9, 1–20.CrossRefGoogle Scholar
Beech, M. (2007). Icewine fetches a Cool $30,000. St. Catharines Standard, January 12th, A1.Google Scholar
Cao, M. and Wei, J. (2004). Weather derivatives valuation and market price of risk. The Journal of Futures Markets, 24, 1065–1089.CrossRefGoogle Scholar
Campbell, S. and Diebold, F.X. (2005). Weather forecasting for weather derivatives. Journal of the American Statistical Association, 100, 6–16.CrossRefGoogle Scholar
Ceniceros, R. (2006). Weather derivatives running hot. Business Insurance, 40, 11.Google Scholar
Chen, G., Roberts, M.C. and Thraen, C.S. (2006). Managing dairy profit risk using weather derivatives. Journal of Agricultural and Resource Economics, 31, 653–666.Google Scholar
Cyr, D. and Kusy, M. (2005). Weather derivatives and their potential use for hedging Canadian icewine production: A case study and simulation. Bacchus in Bourgogne 2nd International Conference, Conference Proceedings, Dijon, France.Google Scholar
Cyr, D. and Kusy, M. (2006). Identification of daily temperature variables for use in hedging icewine production with weather derivatives. Wine in the World: Markets, Tourism and Globalisation, Second International Conference on Economics and Management Sciences, Florence, Italy.Google Scholar
Davis, M. (2001). Pricing weather derivatives by marginal value. Quantitative Finance, 1, 305–308.CrossRefGoogle Scholar
Dischel, B. (2001). Double trouble: hedging risk. Weather Risk Special Report, s24–s26.Google Scholar
Finnegan, J. (2005). Weather or not to hedge. Financial Engineering News, 44, 1–3.Google Scholar
Geman, H. and Leonardi, M. (2005). Alternative approaches to weather derivatives pricing. Managerial Finance, 31, 46–72.CrossRefGoogle Scholar
Hanley, M. (1999). Hedging the force of nature. Risk Professional, 1, 21–25.Google Scholar
He, C., Kennedy, J. S., Coleman, T. F. and Forsyth, P. A. et al. , (2006). Calibration and hedging under jump diffusion. Review of Derivatives Research, 9, 1–36.CrossRefGoogle Scholar
Jewson, S. and Brix, A. (2005). Weather Derivative Valuation: The Meteorological, Statistical, Financial and Mathematical Foundations. Cambridge, U.K.: Cambridge University Press.CrossRefGoogle Scholar
Leggio, K.B. (2007). Using weather derivatives to hedge precipitation exposure. Managerial Finance, 33, 246–252.CrossRefGoogle Scholar
Richards, T.J., Manfredo, M.R. and Sanders, D.R. (2004). Pricing weather derivatives. American Journal of Agricultural Economics, 86, 1005–1017.CrossRefGoogle Scholar
Rossi, E. (1978). White Death – The Blizzard of '77. A Canadian - American survival classic. DVD. Ontario, Canada: Seventy-seven Publishing.Google Scholar
Schreiner, J. (2001). Icewine, The Complete Story, Warwick Publishing, Toronto.Google Scholar
Wei, J. (2002). Weather derivatives; a truly alternative asset class for investors, Canadian Investment Review, 51, Spring.Google Scholar
Yoo, S. (2003). Weather derivatives and seasonal forecast. Working Paper, Cornell University.Google Scholar