Financial Glossary: Cooling Degree Day


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Cooling Degree Day - CDD

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Cooling Degree Day - CDD

Cooling Degree Day - CDD

The number of degrees that a day's average temperature is above 65o Fahrenheit, the temperature at which people Will start to use air conditioning to cool their buildings.

Heating degree day (HDD) and cooling degree day (CDD) are quantitative indices designed to reflect the demand for energy needed to heat or cool a home or business. These indices are derived from daily temperature observations, and the heating (or cooling) requirements for a given structure at a specific location are considered to be directly proportional to the number of heating degree days at that location.

The price of weather derivatives traded in the summer are based on an index made up of monthly CDD values. The Settlement Price for a weather Futures Contract is calculated by summing a month's CDD values and multiplying by $20.

To calculate the CDD, take the average of a day's High and Low and subtract 65. For example, if the day's average temperature is 80oF, its CDD is 15. If everyday in a 30-day month had an average temperature of 80oF, the month's CDD value would be 450 (15 x 30). The nominal settlement value for it is month's Weather derivative contract would therefore be $9000 (450 x $20).

Posted by Institute for International Research

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