Use weather Derivatives options to Hedge the Basic Commodities Volumetric Risk

(An analytical study)

Thesis submitted by

Ashraf  Baderaddin Mohammed Al-Abadi

To the council of the college of Administration  and Economics – Karbala University it is part of the Requirements for a philosophy Doctorate degree of sciences in Banking and Financial sciences

Supervised by

Prof.Dr.

Maitham Rabee Hadi Al- Hassnawi

Climate change has become one of the most powerful speeches in the world. The rise in temperature, which is attributed to the rising levels of carbon dioxide, as well as the increase in the level of precipitation, has led to an increasingly diverse combination of negative climatic, economic, social and biological influences. Thus, the impact of weather on commercial activities is enormous. Obviously, it varies with business, location and climate change. In the agricultural sector, the amount of precipitation can make a big difference in the size of the crop yield. This will be more prominent in developing countries such as Iraq, where over 60% of agricultural produce depends on rainfall. The risks covered by weather derivatives include the potential adverse effect of weather on expected costs, revenues and cash flows. More importantly, in Iraq, agricultural crops can be hedged against the weather through weather forecast options.

Weather derivatives are modern and very impressive innovative tools for the commodification of the weather, that is, to transform the variables of weather balances into a commodity that can be traded in the markets and between dealers, selling and selling. And here is the summit of creativity in the thought of contemporary financial engineering. Therefore, this study attempts to propose and choose the most successful strategies to hedge against the dangers of weather variables. The idea of ​​this method is based on the idea of ​​reducing weather risks that lead to a decrease in crop yields through instantaneous equations according to precise mathematical rules and procedures, and then adopting a distinctive method to solve these equations to solve these equations. The goal behind this is to determine the optimal strategy, which was represented in our study on A simple strategy (buying a put option) and a compound strategy (long straddle).

For the purpose of achieving the objectives of this study, data on heating and cooling degrees and the level of precipitation for the studied countries were collected for the period 2005-2020. Using a number of financial, mathematical and statistical methods, the study concluded with many conclusions. All hypotheses were rejected, perhaps the most important of which is that hedging against weather risk using weather futures options is much better than not hedging at all. The research reached a number of recommendations, the most important of which is the need to resort to international weather derivatives markets in order to hedge Iraq’s imports of wheat and rice crops from the risks of weather fluctuations in the countries exporting these commodities, through cross hedging strategies and establishing a market for weather derivatives in Iraq as a second step after completing all necessary and sufficient requirements To accomplish this, because of this is of great importance in implementing the strategies for managing the weather risk faced by the various economic sectors in the country.