Developing a weather derivative market in South Africa

Faure, Steven Gordon (2006-12)

Thesis (MBA)--Stellenbosch University, 2006.

Thesis

ENGLISH ABSTRACT: Weather derivatives, a new breed of financial assets, allow firms to manage weather risk that disturbs their activities and may lead to variability in earnings and operating cost. Considering that nearly 20% of the U.S. economy alone is directly affected by the weather, weather derivatives are an important development in the area of risk management. This study project explores the concept, functioning and pricing of weather derivatives by reviewing available literature on the topic. It then investigates international weather derivative markets to establish which markets are thriving and what lessons can be learnt from them. This then forms the basis for a set of requirements for developing a weather derivative market in South Africa. Finally, the study project makes a number of recommendations for developing a weather derivative market in South Africa. The findings suggest that, in the absence of a deregulated energy industry, South African suppliers of weather derivatives need to target small·medium size organisations, specifically within the agricultural industry, in order to grow market liquidity. Furthermore, these suppliers need to attract capital market investors either by marketing weather derivatives as a diversification tool to portfolio managers, or by issuing weather·linked bonds as a more familiar investment product for investors. It also suggests that weather data problems can be resolved through, among others, data cleaning and data enhancement techniques and should therefore not impede the growth of a weather derivative market in South Africa.

AFRIKAANSE OPSOMMING: Weer opsies, 'n bundel nuwegenerasie finansiele instruments, stel maatskappye in staat om die invloed van weer op hulle besigheidsaktiwiteite, soos byvoorbeeld die variasie in inkomste en operasionele koste, beter te bestuur. Weer opsies verteenwoordig 'n belangrike ontwikkeling in die area van risikobestuur, inaggenome dat bykans 20% van die V.S.A. ekonomie deur die weer geaffekteer word. Hierdie werkstuk ondersoek die konsep, funksionering, en prysbepaling van weer opsies deur die oorsig en evaluering van die beskikbare literatuur oor die onderwerp. Verder word die internasionale mark vir weer opsies ondersoek om vas te stel waar die grootste suksesse behaal word en watter lesse daaruit geleer kan word. Laastens word daar 'n aantal aanbevelings gemaak vir die ontwikkeling van die weer opsie mark in Suid-Afrika. Die werkstuk bevind dat die verskaffers van weer opsies in Suid Afrika, in die afwesigheid van 'n gedereguleerde energie sektor, klein to medium sakeondernemings (veral in die landbou sektor) moet oormerk en teiken, ten einde mark likiditeit te verhoog. Verskaffers kan kapitaalmark beleggers betrek deur die produk te bemark as 'n diversifisering instrument vir portefeuljebestuurders, of deur die aanbieding van weer geassosieerde verbande as 'n meer alledaagse beleggingsproduk. Daar word verder bevind dat data kwaliteit probleme aangespreek kan word deur gebruik te maak van data-skoonmaak en - verbeterings tegnieke, en dat dataprobleme dus nie 'n effek behoort te hê op die groei van die weer opsie mark in Suid-Afrika nie.

Please refer to this item in SUNScholar by using the following persistent URL: http://hdl.handle.net/10019.1/50596
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