Yugu Xiao, Jing Yao

【Abstract】

        Purpose: Agricultural weather index insurance (WII) has been introduced in pilot or experimental form in many countries. However, the effective demand for WII is often limited by the impact of the basis risk. Thus, the purpose of this paper is to propose a new type of double trigger product, named “supplement” type, to reduce basis risk and improve the performance of the standalone WII.

Design/methodology/approach: Two measures of performance are introduced by the certainty equivalent income of expected utility theory. Through the Monte Carlo experiments and empirical study, this paper compares the performance of three types of double trigger products.

【Keywords】

        agricultural index insurance, basis risk, double trigger product