In this example it is used not in its literal meaning. It's kind of a game. When you are trying to guess something, when you are getting close to the right answer, the other person says "caliente" (hot) or "muy caliente" (very hot). On the other hand, when you have no idea and the answer has nothing to do he says frío (cold). We coud say the hottest you are, the closest to guess the right answer, the coldest you are, you have no idea of the answer, you're in the wrong way.
Of course, it does. The idea of HOT and COLD ( in a game like this) is also used im my native language, Serbian. The kids like to shout loudly these words in order to help the one who has to guess something or find the hidden object. I am not quite sure if this is the case in English and other languages.