re : storage model : simple issues brad ,
here are my thoughts on your concerns .
* you needs curve inputs . this is an it job . i can help you for the curves
before the system is properly set up .
* intrinsic value vs time value :
the intrinsic value depends on how you allocate the volumes . if you have a
rough idea about the allocation as
you did in the spreadsheet , we can calucate the intrinsic value within the
model . the difference between the
total and the intrinsic will be the ( option ) time value . however , by
pre - allocating volumes , you killed some options .
in the storage model , volumes are allocated dynamically , therefore it is
hard to distinguish the intrinsic vs . time value .
* factor of loading : factor of loadings are used to give historical
correlation matrix . the three factors correspond to
paralle shift , slopping and curveture . the covariance matrix in the model
is expressed in the form
covar = row ( vol _ { i } ) * ( correl ( i , j ) ) * colum ( vol _ { j } ) where vols are
the implied volatilities from the vol curve .
( correl ( i , j ) ) = l * l ' + residue ( small )
where l is the factor of loading matrix . so in a simple words , the factor of
loadings ( say , 60 x 3 ) are a simplier way for us to
remember the historical correlation matrix ( say , 60 x 60 ) .
let me know if i can offer further help .
zimin
brad horn 02 / 15 / 2000 07 : 15 am
to : zimin lu / hou / ect @ ect
cc : sandra henderson / hou / ect @ ect
subject : storage model : simple issues
zimin :
thanks for your time with the revised storage valuation . your right to
point out the similarity to market bids . here are some basic questions tied
to implementation and calibration :
model infrastructure / it support : i obviously need to re - build my link to the
forward curves as the model is not working in my new location . short - term
( aprox 1 month ) , i ' d like to establish a link to the ena database egsprod 32
in order to fetch the long - dated price and volatility curves . my link to ena
forward curves would then be quickly severed in favor of the curves generated
by the new bridgeline entity ( database name and data structure yet to be
defined ) . however , its not clear to me what is required in this two stage
process to support your model . any definition of model input or minimum
support requirements you provide is appreciated . i ' ll then work with sandra
henderson , an enron employee providing our it support , to ensure the model
continues to work regardless any downstream system changes that may take
place as we build and establish our separate trading systems or databases .
meanwhile , is there anything you think you can do to ensure im up and running
quickly ?
sandra : linking excel spreadsheets to bridgeline forward curves will be key
to all our pricing projects , not just the storage model supplied by research .
intrinsic vs extrinsic value : it would be helpful to decompose the model ' s
calculated storage price and to distinguish intrinsic vs extrinsic ( time or
option ) value . i could easily link a new spreadsheet tab to your model
inputs and to calculate the intrinsic value , and then through a simple
difference i could determine the extrinsic value . ive included a simple
spreadsheet calculation for the intrinsic value for review . i wanted to
share this with you to ask the following :
does the nature of the model define intrinsic and extrinsic value differently
than the simple difference proposed ?
do you think it would make sense to do the simple value decomposition in the
backcode c - code via . dll in order to ensure run - time is faster ?
my goal here is straightforward : a ) to better understand the model and its
sensitivities . ; and b ) to determine if and when the option approach is
associating significant value above and beyond the simple present value of
the time spreads .
factor loadings : what are some of the thoughts or insights you can offer with
regards to factor loadings and how i should interpret the graph of the 3
factors calculated ? factor loadings have always been a mystery to me . for
example , what problems should i be looking for as a warning against
mispricing ? what , if anything , is implied about 1 day price change or
expected curve re - shapings ( after all , curve - reshapings are key to storage
valuation ! ! ! ) ?
calibration : we are preparing a simple summary of descriptive statistics
which should allow me to refine some of the model inputs . i ' ll share the
data when we are and model results once im up and running .
re : storage model : simple issues
brad ,
here are my thoughts on your concerns .
* you needs curve inputs . this is an it job . i can help you for the curves
before the system is properly set up .
* intrinsic value vs time value :
the intrinsic value depends on how you allocate the volumes . if you have a
rough idea about the allocation as
you did in the spreadsheet , we can calucate the intrinsic value within the
model . the difference between the
total and the intrinsic will be the ( option ) time value . however , by
pre - allocating volumes , you killed some options .
in the storage model , volumes are allocated dynamically , therefore it is
hard to distinguish the intrinsic vs . time value .
* factor of loading : factor of loadings are used to give historical
correlation matrix . the three factors correspond to
paralle shift , slopping and curveture . the covariance matrix in the model
is expressed in the form
covar = row ( vol _ { i } ) * ( correl ( i , j ) ) * colum ( vol _ { j } ) where vols are
the implied volatilities from the vol curve .
( correl ( i , j ) ) = l * l ' + residue ( small )
where l is the factor of loading matrix . so in a simple words , the factor of
loadings ( say , 60 x 3 ) are a simplier way for us to
remember the historical correlation matrix ( say , 60 x 60 ) .
let me know if i can offer further help .
zimin
brad horn 02 / 15 / 2000 07 : 15 am
to : zimin lu / hou / ect @ ect
cc : sandra henderson / hou / ect @ ect
subject : storage model : simple issues
zimin :
thanks for your time with the revised storage valuation . your right to
point out the similarity to market bids . here are some basic questions tied
to implementation and calibration :
model infrastructure / it support : i obviously need to re - build my link to the
forward curves as the model is not working in my new location . short - term
( aprox 1 month ) , i ' d like to establish a link to the ena database egsprod 32
in order to fetch the long - dated price and volatility curves . my link to ena
forward curves would then be quickly severed in favor of the curves generated
by the new bridgeline entity ( database name and data structure yet to be
defined ) . however , its not clear to me what is required in this two stage
process to support your model . any definition of model input or minimum
support requirements you provide is appreciated . i ' ll then work with sandra
henderson , an enron employee providing our it support , to ensure the model
continues to work regardless any downstream system changes that may take
place as we build and establish our separate trading systems or databases .
meanwhile , is there anything you think you can do to ensure im up and running
quickly ?
sandra : linking excel spreadsheets to bridgeline forward curves will be key
to all our pricing projects , not just the storage model supplied by research .
intrinsic vs extrinsic value : it would be helpful to decompose the model ' s
calculated storage price and to distinguish intrinsic vs extrinsic ( time or
option ) value . i could easily link a new spreadsheet tab to your model
inputs and to calculate the intrinsic value , and then through a simple
difference i could determine the extrinsic value . ive included a simple
spreadsheet calculation for the intrinsic value for review . i wanted to
share this with you to ask the following :
does the nature of the model define intrinsic and extrinsic value differently
than the simple difference proposed ?
do you think it would make sense to do the simple value decomposition in the
backcode c - code via . dll in order to ensure run - time is faster ?
my goal here is straightforward : a ) to better understand the model and its
sensitivities . ; and b ) to determine if and when the option approach is
associating significant value above and beyond the simple present value of
the time spreads .
factor loadings : what are some of the thoughts or insights you can offer with
regards to factor loadings and how i should interpret the graph of the 3
factors calculated ? factor loadings have always been a mystery to me . for
example , what problems should i be looking for as a warning against
mispricing ? what , if anything , is implied about 1 day price change or
expected curve re - shapings ( after all , curve - reshapings are key to storage
valuation ! ! ! ) ?
calibration : we are preparing a simple summary of descriptive statistics
which should allow me to refine some of the model inputs . i ' ll share the
data when we are and model results once im up and running .