Degree day swap

Degree day swap,

Definition of Degree day swap:

  1. Hedging arrangement under which two parties exchange their cash flows at the end of a specified period based on the difference between the negotiated average degree days (the strike level) and the actual degree days (as evidenced by a temperature index) in that period. For example, a gas company expecting reduced revenue due to a forecasted warmer-than-normal winter sells a heating degree day (HDD) swap at a strike level of 1000 HDDs for the winter months (the swap period), to settle at $10,000 per degree day. At the end of the swap period, the company pays $10,000 for every degree day less than 1000 and receives $10,000 for every degree day higher than 2000. It is a type of weather derivative, pioneered by the US firm Enron energy corporation and traded first time in September 1997 between it and another US firm, Koch Industries.

Meaning of Degree day swap & Degree day swap Definition