Risk glossary

 

Degree day

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.

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