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Derivatives

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  • May 15, 2021
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CDD Option

A weather derivative (specifically a degree day option) that gives the holder the right, without the obligation, to trade (buy or sell) a weather-related underlying asset, namely the cooling degree days (CDDs) index. The CDD measures the cooling demand that arises by upward diversion of average daily temperatures from a base level. More specifically, the CDD is the number of degrees by which the day’s average temperature is above a base temperature. The option’s payoff is usually defined as a specified amount (e.g. USD1000 per degree day) multiplied by differences between the strike CDD level set out in the contract and the actual cumulative CDD level which was observed during the option’s life.


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