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Enron Mail |
Frank:
One of the most likely scenarios for a VAR blowout would be a severe cold front hitting the country in the middle to latter part of the winter. In such a circumstance, cash may separate from prompt futures similar to how Midwest power traded $5000+ on specific days last year while prompt futures were $200. The correlation between prompt and cash is normally very strong, and is indicated by the small VAR associated with a spread position currently. But in the winter that may change. Another thing to keep in mind while developing this scenario is the assymetric risk presented by having a spread position on. Assuming we enter the winter with normal to below normal storage levels, a position of long cash, short prompt futures has a long tail only on the positive p&l side. While such a trade in an efficient market has expected payout of 0, the payout probabilities may look like the following: 20% $ -.05 40% $ -.02 20% $ 0 19% $ .03 1% $ 1 Enron North America Corp. From: Frank Hayden @ ENRON 07/20/2000 02:12 PM To: Fletcher J Sturm/HOU/ECT@ECT, John Arnold/HOU/ECT@ECT cc: Subject: Stress Testing RAC is working on developing some "canned" stress tests regarding VaR. For example, one test could be called "hurricane", were the prompt month is "stressed" on both price and vols, holding all other inputs constant. Anyway, I would like to know of any likely/realistic stress scenarios you can think of.... Let me know, Frank
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