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Int. J. Financial Stud. 2017, 5(1), 2; doi:10.3390/ijfs5010002

Effectiveness of Weather Derivatives as a Risk Management Tool in Food Retail: The Case of Croatia

Trade Department, Faculty of Business and Economics, University of Zagreb, J. F. Kennedy Square 6, 10000 Zagreb, Croatia
Academic Editors: Chi Keung Lau and Satish Sharma
Received: 30 September 2016 / Revised: 1 December 2016 / Accepted: 12 December 2016 / Published: 1 January 2017
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Abstract

Non-catastrophic weather risk is gaining importance as climate change becomes more pronounced and economic crisis forces companies to strengthen their cost control. Recent literature proposes weather derivatives as flexible weather risk mitigating tools. Only a handful of studies analysed the feasibility of weather derivatives in industries other than agriculture and energy. The purpose of this paper is to review available weather risk management solutions in retail, present weather derivatives as non-catastrophic weather risk management tools, empirically demonstrate the process of designing weather derivatives and assess their effectiveness as risk mitigating tools in retail. Empirical analysis is performed on beverage sales in 60 large food stores in Croatia, and performance of monthly temperature put options during the summer season is examined. For weather sensitivity analysis of sales, the method of panel regression was used. Results show that weather has a statistically significant effect on beverage sales and that weather derivatives prove to be effective in beverage sales uncertainty reduction. Their effectiveness differs between covered periods and cities. View Full-Text
Keywords: non-catastrophic weather risk; weather derivatives; weather risk management; hedging effectiveness; food retail non-catastrophic weather risk; weather derivatives; weather risk management; hedging effectiveness; food retail
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MDPI and ACS Style

Štulec, I. Effectiveness of Weather Derivatives as a Risk Management Tool in Food Retail: The Case of Croatia. Int. J. Financial Stud. 2017, 5, 2.

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