5 ms·

> If you believe the next year will be dryer than normal, you will buy more futures than normal. The point is that you, the farmer, don't need to take a view o

> If you believe the next year will be dryer than normal, you will buy more futures than normal. The point is that you, the farmer, don't need to take a view on whether the next year will be drier than normal. You just buy $X worth of rainfall futures. The same way you shouldn't buy more flood insurance if you think the next year will be exceptionally wet. You can't really predict that, after all. You should buy flood insurance roughly up to the value of restoring your house after a flood, and you should hope the insurance market is healthy enough that the cheapest provider of that insurance offers you a price that reflects the expected value of the insurance plus a small markup.

joshuamorton 2y ago
> The point is that you, the farmer, don't need to take a view on whether the next year will be drier than normal. You just buy $X worth of rainfall futures. And I'll reiterate, this is a function of your risk-aversion/efficiency. One would expect, for example, climate change to increase the price of weather futures as extreme/problematic weather events become more likely. It's often difficult to see the impact of these changes on the scale of a single farmer, but in aggregate lots of farmers do a market make. > You should buy flood insurance roughly up to the value of restoring your house after a flood, and you should hope the insurance market is healthy enough that the cheapest provider of that insurance offers you a price that reflects the expected value of the insurance plus a small markup. And the insurance companies have a small army of actuaries who make sure that the prices they provide take into account conditions like the relevant risk factors of where your home is. This is instead of a betting market style concept, where you could instead imagine every individual actuary as a potential insurer.
kortilla 2y ago
> You just buy $X worth of rainfall futures. The cost of that varies though. If you have to pay $95 to get a $100 payout that’s a very different calculus from $50 for $100.
TeMPOraL 2y ago
> The point is that you, the farmer, don't need to take a view on whether the next year will be drier than normal. You just buy $X worth of rainfall futures. Sure, but if I, a non-farmer market player that couldn't give two fucks what the market is even about, can predict that the next year will be dryer than normal, and to what degree, better than anyone, I can make money buying up however many of these futures I can afford. It works even better if I can actually make the weather more dry somehow. This, I believe, is called "providing liquidity to the market", but curiously, if I tried that with flood insurance, I'd just be guilty of insurance fraud.

joshuamorton 2y ago

> The point is that you, the farmer, don't need to take a view on whether the next year will be drier than normal. You just buy $X worth of rainfall futures. And I'll reiterate, this is a function of your risk-aversion/efficiency. One would expect, for example, climate change to increase the price of weather futures as extreme/problematic weather events become more likely. It's often difficult to see the impact of these changes on the scale of a single farmer, but in aggregate lots of farmers do a market make. > You should buy flood insurance roughly up to the value of restoring your house after a flood, and you should hope the insurance market is healthy enough that the cheapest provider of that insurance offers you a price that reflects the expected value of the insurance plus a small markup. And the insurance companies have a small army of actuaries who make sure that the prices they provide take into account conditions like the relevant risk factors of where your home is. This is instead of a betting market style concept, where you could instead imagine every individual actuary as a potential insurer.

kortilla 2y ago

> You just buy $X worth of rainfall futures. The cost of that varies though. If you have to pay $95 to get a $100 payout that’s a very different calculus from $50 for $100.

TeMPOraL 2y ago

> The point is that you, the farmer, don't need to take a view on whether the next year will be drier than normal. You just buy $X worth of rainfall futures. Sure, but if I, a non-farmer market player that couldn't give two fucks what the market is even about, can predict that the next year will be dryer than normal, and to what degree, better than anyone, I can make money buying up however many of these futures I can afford. It works even better if I can actually make the weather more dry somehow. This, I believe, is called "providing liquidity to the market", but curiously, if I tried that with flood insurance, I'd just be guilty of insurance fraud.