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Heating Degree Day
Definition
A heating degree day (or HDD) relates to the temperature at which a building is forced to turn on its heating system. It is a calculation used by the futures market and it relates to weather traded derivatives. It is calculated as the greater of either, 1) the average daily temperature minus 65 degrees Farenheit, or 2) if the temperature is at or above 65 degrees Farenheit, the HDD is equal to zero (0).
Using the term Heating Degree Day :
On the future exchange, these contracts are settled on a monthly basis (using the 30 / 360 convention, meaning all months are represented by 30 days). The calculation is comprised of adding together all HDD's for a month and then multiplying that number by $20 to get to a settlement price for that month. So profits and losses are marked using this method.
Pay Special Attention To :
Weather derivatives can be extremely volatile. Trading these derivatives is best left to professional investors and industry players that need to hedge positions.
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Related terms
Derivatives , Futures
