Managing economic risk caused by insects: bug options

The market for insuring insect damage is far from complete. This study introduces a new type of derivative instrument‐insect derivatives‐that provide growers a market‐based means of transferring insect risk to speculators or others who may profit from higher insect populations. A risk‐neutral valuation model is developed and applied to Bemisia tabaci population data. Economic simulation models show how insect derivatives can improve risk‐return results for a representative cotton farm in the Imperial Valley of California. The results suggest that insect derivatives may become important risk management tools for a wide range of growers.