ing a season and take into consideration the fact that plants are connected to a certain temperatures in relation with the germination and development phases and with the crop under discussion. As far as the financial structure of the weather options is concerned, this
one is similar to the financial options. First, we can speak about the exercise price, which represents the limit level for the beginning of the payment to the protection buyer. Another important element, as previously specified, is repre- sented by the weather station where the parameters off the index are deter- mined. In addition, taking into account the nature of the weather risks in the case of the crops, a very important element is the maturity of the options. In addition, there must be specified the value to be paid per index and the maxi- mum value that the seller is obliged to pay to the buyer. One of the weather risks often met in the case of crops refers to the ex-
treme volatility of the temperatures. Therefore, when one considers that har- vests will be affected by extremely high temperatures, one can opt for a call option on an index like CDD. Differently, when one considers hedging against extremely low temperatures, one can opt for the purchase of a put option on an HDD index type.
As we can see, in case of the farming sector, modeling the weather de- rivatives is a complex process. If in the majority of sectors, one can create a contract to cover against a single risk, in the case of the farming sector, there are certain meteorological phenomena that can have a concomitant influence: for the summer period, certain crops can be affected both by drought and by abundant rainfalls. Some papers (Agarwal,. 2002) presents as a support asset for the weather contracts the level of soil humidity. This one modifies with the type of soil and with the geographical characteristics of the area where it is com- puted, with the climate changes in the respective zone and with the human interventions. Therefore, it can negatively or positively influence the crop de- pending on its type. One of the major advantages of this one resides in the fact that it can be used to cover different risks such as floods, drought, or rain- falls. For the call options on the soil humidity index (Water Table Index) one recommends a model through which the premium is paid by the operator at the contract’s inception. In case the difference between the WTI index and the exercise price is positive, the option seller pays an amount equal to this differ- ence multiplied with a tick value. Before the creation of the weather derivatives, the farming companies could manage exclusively the price risk by use of commodity futures and op- tions contracts. In agriculture, are especially important the risks regarding the rainfalls level: after a period characterized by hard drought, the farmers are reducing the areas cultivated if they expect more reduced rainfalls than the normal level. On the other hand, abundant rainfalls can affect at their turn the harvest through the manifestation of some specific maladies.
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