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Heating Degree Day - HDD
       
 
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Heating Degree Day - HDD

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Heating Degree Day - HDD
The number of degrees that a day's average temperature is below 65o Fahrenheit (18o Celsius), the temperature below which buildings need to be heated.
    
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 winter is based on an index made up of monthly HDD values. The Settlement Price for a weather Futures Contract is calculated by summing HDD values for a month and multiplying that sum by $20.
    
To calculate HDD, take the average of a day's High and Low temperatures and subtract from 65. For example, if the day's average temperature is 50o F, its HDD is 15. If every day in a 30-day month had an average temperature of 50o F, the month's HDD value would be 450 (15 x 30). The nominal settlement value for this month's Weather derivative contract would therefore be $9,000 (450 x $20).
Posted by  Institute for International Research
 
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