Hedging the financial risk from water scarcity for Great Lakes shipping
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Authors
Meyer, Eliot S.
Characklis, Gregory W.
Brown, Casey
Moody, Paul
Issue Date
2016
Type
journal-article
Language
Keywords
Environmental financial risk , Droughts , Index insurance
Alternative Title
Abstract
Low water levels in the Great Lakes have recently had significant financial impacts on the region's commercial shipping, which transports hundreds of millions of dollars' worth of bulk goods each year. Cargo capacity is a function of a ship's draft, the distance between water level and the ship's bottom, and lower water levels force ships to reduce cargo loads to prevent running aground in shallow harbors and locks. Financial risk transfer instruments, such as index‐based insurance contracts, may provide an adaptable method for managing these financial risks. In this work, a relationship between water levels and shipping revenues is developed and used in an actuarial analysis of the frequency and magnitude of revenue losses. This analysis is used to develop a standardized suite of binary financial contracts, which are indexed to water levels and priced according to predefined thresholds. These contracts are then combined to form hedging portfolios with different objectives for the shippers. Results suggest that binary contracts could substantially reduce the risk of financial losses during low lake level periods and at a relatively low cost of only one to three percent of total revenues, depending on coverage level.
Description
Citation
Meyer, E. S., Characklis, G. W., Brown, C., and Moody, P. (2016), Hedging the financial risk from water scarcity for Great Lakes shipping, Water Resour. Res., 52, 227–245, doi:10.1002/2015WR017855.
Publisher
Water Resour. Res.
License
Journal
Volume
Issue
PubMed ID
ISSN
0043-1397
1944-7973
1944-7973