A measure of the variation of one day’s temperature against a standard reference temperature, typically 65° Fahrenheit (18° Celsius). Degree days are used as a basis for temperature-related weather derivative deals. There are both cooling degree days (CDDs) and heating degree days (HDDs). For example, a firm takes out a 30-day CDD swap with a reference temperature of 65°F, and the average temperature on each day is 70°F. The company is then due 150 (30 x 5) degree days multiplied by the sum of money agreed for each degree day. If the firm had taken out an HDD swap, it would have owed the same amount of money.
Commodity trading and risk management is a subject that is necessarily complicated, and is becoming more so. The Energy Risk Glossary seeks to disentangle and clarify the jargon by providing definitions of commonly used energy and commodity market terms.
These include definitions related to a variety of underlying energy products, as well as technical terms about the many instruments and benchmarks used by energy market participants.
Many of the most recent terms to have been added to our glossary stem from the actions of regulators since the 2008 global financial crisis. The onset of rules, such as the US Dodd-Frank Act and European Market Infrastructure Regulation, has markedly increased the cost and complexity associated with commodity trading. Perhaps they have also increased the need for a handy reference guide such as this.
The glossary is extensively cross-referenced, making for easy and thorough searches. We hope you find the latest edition of the Energy Risk Glossary to be a useful resource.
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