Spatial-Temporal Model of Insect Growth, Diffusion and Derivative Pricing

Insect derivatives represent an important innovation in specialty crop risk management. An active over-the-counter market in insect derivatives will require a transparent pricing method. This paper develops an econometric model of the spatio-temporal process underlying a particular insect population and develops a pricing model based on this process. We show that insect derivatives can play an important risk management role in mitigating "B. tabaci" (whitefly) damage in cotton. Beyond developing a new risk management instrument, the key methodological contribution of this paper lies in pricing derivatives with stochastic properties in both space and time dimensions. Copyright Copyright 2008 Agricultural and Applied Economics Association.