Modeling and Designing of Rainfall Derivative Contract in India

There has been a prolonged discussion on the use of rainfall derivatives in the Indian conditions. The use of rainfall derivative instruments that could empower the ecosystem of trading and absorbing rainfall risk. The study adopted a unique approach of designing the rainfall indexation based on proposed metrics which is DRD/ERD index, this could be used as building blocks for designing rainfall derivatives similar to HDDs/CDDs underlying temperature derivatives. DRD/ERD values are computed for 36 meteorological subdivisions of India. The basic rainfall future contract structure is defined and analyse how it can reduce the rainfall risk. Like CAT bonds and weather derivatives, rainfall derivatives constitute potentially a distinct asset class and hence could be an added arsenal in the hands of investors for enriching their portfolios.