It stands for heating degree days swap; a degree day swap that combines a call and put option with the same strike HDD and on the same underlying location (e.g. city). This swap is mainly used to stabilize revenues over a specific period of time. An investor who long the swap (the buyer) will receive payment if the actual (recorded) HDD is greater than the strike level, and will have to pay out if the actual (recorded) HDD is lower than the strike.

This swap is used as a hedge against risks associated with changes in temperature over the course of a given period.