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. 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. Investopedia Says:
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 tis month's weather derivative contract would therefore be $9000 (450 x $20). Related Terms:
Futures
Heating Degree Day - HDD
Settlement Date
Settlement Price
Weather Derivative |