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 mitigatingB. 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.