Drought option contract price

Drought, defined as the relation of the temporary unbalance of moisture content in a region to the water shortage in that region, is one of the most important disasters that influence living things and economy. Drought, now and again, has made its presence felt in our country as well as other parts of the world. Drought, along with its damage to the nature, causes great troubles for economy, especially the agriculture sector. We will be frequently hearing of drought in the near future as a result of global warming.In this study we aimed at obtaining a drought option price for Harran Plane area. In order to achieve this aim, we used the SPI (Standardized Precipitation Index) values, used in Turkey, instead of the drought index called RDI (Reconnaissence Drought Index), as the drought measurement value in the formula. We generated the missing data for 1977 in the drought measurement values obtained from the General Directorate of Meteorology, using the mean of the data at hand. We tried to evaluate whether cotton is suitable to grow in Harran region, using the drought values of the periods covering the growing-time of cotton. In the light of the results obtained, we interpreted if it is possible to determine an option price for cotton, which is suitable for growing in Harran Region, using the SPI data in a Drought Option Pricing Model instead of RDI values. As a result, we tried to produce a new option price with the data we generated using different distributions.