Hedging of crop harvest with derivatives on temperature

This article studies hedging strategies of crop harvest incomes with futures and options on indexes of cumulated average temperatures (CAT). To account for the time and space de- pendence, temperatures and crop yields are modeled by three dimensions Gaussian fields. In this framework, we study the features and dynamics of CAT futures and CAT basket options. Next, we find the portfolio of CAT futures minimizing the variance of incomes from crop in different regions. We compare this hedging strategy to the portfolio maximizing the expected exponential utility of incomes. Furthermore, we assess the impact of CAT basket options on the variance of crop incomes. We conclude this work by a realistic case study in which the harvest of green maize in two Belgian regions is hedged against adverse deviations of temper- atures with CAT futures or options.