It stands for heating degree days, a term that refers to the maximum of zero or the amount by which the daily average temperature falls below 65 Fahrenheit (or 19 0 C). An HDD, in other words, is the number of degrees by which the day’s average temperature is below a base temperature. Mathematically, it is calculated as follows:
Daily HDD= Max (0, base temperature – daily average temperature), where base temperature is the pre-set temperature, 65 degrees Fahrenheit, but sometimes 75 in warmer climates.
The average temperature is simply the average of the highest and lowest temperature (calculated midnight to midnight). When daily temperature is less than 65 F, people begin using heaters to warm their houses and offices. The index of monthly values of heating degree days is usually used to figure out the price of weather derivatives that trade in winter. More specifically, to determine the settlement price for a weather derivative, HDD values for a specific month are added up and the sum is then multiplied by US$20. For instance, if average temperature is 60F, then the HDD value is 65- 60= 5. The HDD value for the month is 5 X 30= 150. Finally, the settlement value for the weather derivative for that respective month would be: 150 X US$ 20 = US$ 3000.
The HDD measurement is commonly used in the energy market to determine the degree of weather warmth for a particular region. It is usually used in estimating fuel consumption.
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