re : enpower i have not personally talked to james about these issues in enpower . his
concerns regarding swaptions and asian options are accurate . it is currently
working on new volatility curves for swaptions to use . it is also working on
correlations in order for asian options to be valued properly . london trades
many more swaptions and asian options than the us ; therefore , the impact of
not having swaption volatility curves and correlations is greater to them .
the majority of options in the u . s . are european monthly and daily exercises
and the current volatility curves adequately take care of these deals . the
idea of swaption volatility curves has floated around in the us , but other
more material items always got in the way and we continue to use the deal
specific volatilities for the swaptions we do have . once the technology is
in place to use swaption volatilities we will also adopt . the system was
originally built to handle the physical power world that existed in the us
and as new markets and new ideas ( such as the us becoming more and more of a
financial market ) we will need to enhance enpower to follow suit . swaption
vols and asian options are two of these enhancements .
also , it is difficult to get option data out of enpower . we have in stage an
option sensitivity matrix that , once implemented into production . i will be
sure that james knows about . it probably will not solve all his problems ,
but it will give him a starting place .
stacey
enron north america corp .
from : sally beck 12 / 11 / 2000 11 : 00 am
to : stacey w white / hou / ect @ ect
cc :
subject : enpower
in cleaning up e : mails , i ran across this one that i had not yet read . has
james called and talke with you about enpower ? are his concerns in the memo
accurate ? let me know . - - sally
- - - - - - - - - - - - - - - - - - - - - - forwarded by sally beck / hou / ect on 12 / 11 / 2000 11 : 03 am
- - - - - - - - - - - - - - - - - - - - - - - - - - -
fernley dyson
11 / 29 / 2000 02 : 54 am
to : richard causey / corp / enron @ enron , sally beck / hou / ect @ ect
cc :
subject : enpower
just a heads - up - a long - winded email , but please see highlighted paragraphs .
i find it hard to believe the scenario portrayed here , but stranger things
have happened - will keep you posted .
- - - - - - - - - - - - - - - - - - - - - - forwarded by fernley dyson / lon / ect on 29 / 11 / 2000 08 : 44
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james new
28 / 11 / 2000 13 : 42
to : ted murphy / hou / ect @ ect , david port / market risk / corp / enron @ enron
cc : mike jordan / lon / ect @ ect , coralie evans / lon / ect @ ect , fernley
dyson / lon / ect @ ect
subject : status update on the issues surrounding continental power
volatilities and correlations
as you know for some time we have been trying to get the continental power
traders to increase the volatilities they use for valuing their option
portfolio and for use in calculating their var as it has been obvious that
the market has become more volatile but this was not being reflected in
their mark .
in looking at the impacts of this , various other issues came to light .
firstly it raised issues over the correlation matrix used in the var model as
this was way out of date . we have worked with jitendra and have now put in a
matrix that both the traders , risk and rac are happy with . secondly , as you
may be aware , in portcalc swaptions currently use the volatility input on the
deal ticket and not off any volatility curve .
the current portfolio is 90 % swaptions and so this represents a serious issue
for us in that it is not practical to manually change all the volatilities at
the deal ticket level every time the implied voaltilities change . we cannot
use the option functionality as this only values hourly or daily exercise
options and not fixed expiry swaptions or options . we also have not found any
way in portcalc of valuing asian options so we are having to ' force ' in the
few we have . we have had the houston based portcalc it team work on a ' new '
piece of swaption valuation code but currently it contains a number of
worrying bugs . these are primarily that the proposed code does not take the
correct underlying forward price and uses the volatility of ( approximating )
the last day of the underlying rather than the implied volatility of the
underlying .
they are currently being hampered in that they do not have any it personnel
who have sufficient option knowledge ( i understand that the two most
experienced coders resigned to go to another houston based energy company ) .
this is extremely worrying and i find it hard to believe that the whole of
enron ' s power business is having to use the methodology of inputting the
volatility at the deal ticket level . this will almost certainly mean that
different volatilities are being used in the var as are being used to value
the swaption portfolio globally . as well as these issues we have concerns
over the use and accuracy of the smile adjustment in portcalc ( worryingly it
does not seem that you can ' switch ' this off ) . briefly it seems that portcalc
calculates the delta used to adjust the volatility by comparing the strike
price to the forward price of the last day of the underlying rather than the
forward price of the underlying itself .
we have engaged london based it and are looking at the code we have used in
power 99 to se if there is a way we can get something done quickly to start
to value all option products off a curve and to be able to book asian options .
once we get the above resolved we still have no way or extracting the vega or
gamma risk from portcalc in it ' s current state as the information is just no
there ( so we are told by it ) . the system ' seems ' ( we cannot be 100 % sure
given all the other errors ) to produce a vega and gamma p & l number but what
the risk is remains a mystery . again this is very worrying in that we have
power option traders all over the world who can ' t get their underlying vega
or gamma risk position from the global valuation system . we are trying to
work on something manual to draw a line in the sand but i would really like
to know how the american based traders cope as they have this problem
( knowingly or not ) for years . what sign offs were gained for the
implementation of enpower because it seems to us that using the current
system it is not possible to comply with the global risk policy . how do we
validate the inputs to the valuation if we do not know the risk ?
despite the above we have now persuaded the traders to save out newer higher
volatilities a week ago and you should have seen a large move up in their
var . however , as it stands at the moment they are notable to save out a daily
remark as jitendra is saying that he is not happy with their ' model ' / vol
curve generator ( i have today asked for a full explanation , details of any
testing etc etc and time lines so we can move to getting over this hurdle ) .
the swaptions have also not yet had the ticket volatility changed but the
impacts are expected to be positive as we are long volatility .
i would appreciate your comments on the above as it seems that we are pushing
the boundaries here on areas which we really expect to have already been
covered in houston some time ago and could do with some help . we are having
to use a system which seems to us to have numerous bugs and short comings and
are having to spend an enormous amount of it time overcoming the inadequacies
of enpower wich i do not think most people are aware of . consequently we have
not been able to deliver all the improvements we were required to do in
gaining the increased limits so 3 months ago but i would hope you agree that
it is not for a lack of trying .
sorry it ' s so long but if there are any questions or any perceived
inaccuracies in any of the above then please let me know .
james