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Abstract

This article develops an Indifference Pricing model for a weather derivative that is traded over the counter. The model is used to calculate ask and bid prices for a put option on a weather index in Germany. We find that under moderate risk aversion the maximal bid prices of grain producers exceed the minimal sell prices of insurers only for a few regions and crops, due to the presence of basis risk. Another finding is that the actuarially fair price may lead to wrong conclusions about the market potential of weather insurance.

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