Farmers and Price Instability Risks: An Adaptation of the Black-Scholes Model in the Agricultural Insurance Premium Mathematics Formulation
Keywords:
Agricultural insurance, Black-Scholes model, European option, Insurance premium mathematics formulation, Ito ̂ process.Abstract
This research discusses agricultural insurance, which provides coverage to customers (farmers) for losses caused by falling prices of agricultural commodities. In calculating agricultural insurance premiums, the price component is assumed to follow a Geometric Brownian motion. So that through the process, a price target can be determined which will be used as a reference to decide whether the customers experience a loss at the harvest time. The Black-Scholes model approach is used to construct the mathematics formula for determining insurance premiums for agricultural commodity prices. The research data includes: (1) commodity price data (red chilies, shallots, and garlics) in the provinces of West Sumatra, Jambi, and Bengkulu, which are then simulated and included in the model building, so that a value for the agricultural insurance premium can be obtained; (2) Survey data to farmers in central agricultural areas in West Sumatra and Jambi to review the farmer’s tendency level towards agricultural insurance. As for data analysis, R program is utilized.
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