COOLING DEGREE DAY CDD

The number of degrees that a day's average temperature is above 65^o Fahrenheit and people start to use air conditioning to cool their buildings. The price of weather derivatives trading in the summer are based on an index made up of monthly cooling degree day (CDD) values. The settlement price for a weather futures contract is calculated by summing a month's CDD values and multiplying by $20.

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 80^oF, its CDD is 15. If everyday in a 30 day month had an average temperature of 80^oF, the month's CDD value would be 450 (15 x 30). The nominal settlement value for its month's weather derivative contract would therefore be $9,000 (450 x $20).