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Market-based methods for monetizing uncertainty reduction

  • Roger Cooke
  • Alexander GolubEmail author
Article
  • 32 Downloads

Abstract

New measurement systems are often expensive and need a solid economic justification. Traditional tools based on the value of information are sometimes difficult to apply. When risks are traded in a market, it may be possible to use market instruments to monetize the reductions in uncertainty. This paper illustrates such market-based methods with a satellite system designed to reduce uncertainty in predicting soil moisture in the USA. Soil moisture is a key variable in managing agricultural production and predicting crop yields. Using data on corn and soybean futures, we find that a 30% reduction in the weather-related component of uncertainty in corn and soybean futures pricing yields a yearly US consumer surplus of $1.44 billion. The total present value of information from the satellite system for the USA—calculated with a 3% discount rate—is about $22 billion, assuming the system is in operation for 20 years. The global value of the improvements in weather forecasting could be $63 billion.

Keywords

Value of information Options pricing SMAP Bachelier formula Black–Scholes-Merton model 

JEL Classification

C02 C44 C58 D80 D81 

Notes

Acknowledgements

This research was supported through NASA cooperative agreement number NNX17AD26A with RFF to estimate the value of information obtained from satellite-based remote sensing. Helpful conversations with Vanessa Escobar and Paula Bontempi are gratefully acknowledged.

Supplementary material

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Copyright information

© Springer Science+Business Media, LLC, part of Springer Nature 2019

Authors and Affiliations

  1. 1.Resorses for the FutureWashingtonUSA
  2. 2.American UniversityWashingtonUSA

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