A heating degree day (HDD) is a measurement designed to quantify the demand for energy needed to heat a building. It is the number of degrees that a day’s average temperature is below 65o Fahrenheit (18o Celsius), which is the temperature below which buildings need to be heated. The price of weather derivatives traded in the winter is based on an index made up of monthly HDD values. The settlement price for a weather futures contract is calculated by summing HDD values for a month and multiplying that sum by $20.
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