The farmer could, of course, purchase index insurance contracts on more
than one weather station. It is an empirical question whether a “portfolio” of
insurance contracts would have lower basis risk than a single contract based on
the nearest weather station. However, it seems likely that a portfolio of contracts
would reduce basis risk more for weather variables such as rainfall that are
more spatially idiosyncratic than for weather variables such as temperature and
humidity that tend to be more spatially covariate.