
Cooling Degree Day (CDD)
A cooling degree day (CDD) is a measurement designed to quantify the demand for energy needed to cool buildings. Meanwhile, if every day in a 30-day month had an average temperature of 75o F, the month's CDD value would be 300 (10 x 30). A cooling degree day (CDD) is a measurement designed to quantify the demand for energy needed to cool buildings. Furthermore, the average CDD in one building may not have the same impact as it does on the building next door due to differences in construction, orientation relative to other buildings, insulation, sun exposure, and the nature of the building's usage. If a given day's value is less than or equal to zero, that day has zero CDD.

What Is a Cooling Degree Day? (CDD)
A cooling degree day (CDD) is a measurement designed to quantify the demand for energy needed to cool buildings. It is the number of degrees that a day's average temperature is above 65o Fahrenheit (18o Celsius). Studies have shown that when the outside temperature reaches that level, people inside no longer want the building heated, but instead begin to consider cooling the building.
This measure has relevance to the price of weather derivatives traded on the basis of an index made up of monthly CDD values. The settlement price for a weather futures contract is calculated by summing CDD values for a month and multiplying that sum by $20.




Understanding Cooling Degree Days (CDD)
While CDD can describe the overall need for cooling as part of the planning for residential or commercial buildings, it is critical for the pricing of weather derivatives. These instruments create a risk management tool that utility, agriculture, construction, and other firms can use to hedge their activities affected by outdoor climate, whether it be energy demand, growing season, or outdoor work time.
One thing to note is that CDD are extremely localized. Cooling needs vary greatly depending on the geographical region. Furthermore, the average CDD in one building may not have the same impact as it does on the building next door due to differences in construction, orientation relative to other buildings, insulation, sun exposure, and the nature of the building's usage.
A similar measurement, heating degree day (HDD), reflects the amount of energy needed to heat a home or business.
How to Calculate Cooling Degree Days (CDD)
There are several ways to calculate CDD. The more detailed a record of temperature data, the more accurately the CDD can be calculated. Here are examples of two ways that are often used.
A utility company might recognize that the price they are paying energy producers will be cost-prohibitive if they need to provide more energy than they expected. Using the information from the previous example, they could take weather data from previous years and current seasons to estimate their risk. Weather derivative (futures) contracts could then be purchased to protect against significant losses if the company expected higher temperatures. These same contracts could likewise be sold if the company expected significantly lower temperatures.
Related terms:
Futures Contract
A futures contract is a standardized agreement to buy or sell the underlying commodity or other asset at a specific price at a future date. read more
Futures Exchange
A futures exchange is a central marketplace, physical or electronic, where futures contracts and options on futures contracts are traded. read more
Heating Degree Day (HDD)
A heating degree day (HDD) is the degrees that a day's average temperature is below 65 Fahrenheit (18 Celsius), used to quantify the demand for energy. read more
Hedge
A hedge is a type of investment that is intended to reduce the risk of adverse price movements in an asset. read more
Measuring Natural Gas in MCF
MCF is an abbreviation that refers to the way natural gas is measured in the United States, in which the imperial measuring system is used. read more
Mini-Sized Dow Options
A mini-sized Dow is a type of option for which the underlying assets are the E-Mini Dow futures. E-mini-Dow futures are worth $5 multiplied by the DJIA. read more
Nominal
Nominal is a common financial term with several different contexts, referring to something small, an unadjusted rate, or the face value of an asset. read more
Risk Management in Finance
In the financial world, risk management is the process of identification, analysis, and acceptance or mitigation of uncertainty in investment decisions. read more
Settlement Price
A settlement price, in the derivatives markets, is the price used for determining profit or loss for the day, as well as margin requirements. read more
Weather Insurance
Weather insurance offers financial protection against losses incurred by adverse, measurable weather conditions. read more