New Volatility Curve Generator for UK Power

We have established a set of power volatility curves down to the EFA/monthly
level of detail that can be marked to market up to 6 years out. Beyond this,
the volatility decays to what we understand to be the long-term level for
power volatility, given our understanding of the behaviour of forward prices
over large time-scales.

The swaption traders can now fit the first 5-6 years of the volatility curve
to the market-observed baseload swaption implied volatilities (typically 3 to
12 months duration for the underlying swap) and then be in a good position to
price other swaptions (including swaptions on individual EFA slots)
consistent with the curve. There may also be an impact on the daily VaR
calculation.

An illustration of the current volatility curves is pasted below:-

These curves will be reset as the market moves, and allow a mark-to-market
approach to be followed for our volatility book. The spreadsheet model is
saved in T:\READWRTE\ELEC_UK\MODELS\VOLCURVEGENERATORNEW.XLS and also
attached below for Houston staff to review.

[Stinson - I'd be grateful if you could offer an opinion/audit to ensure that
I haven't missed anything, thanks.]

Regards,

Anjam
x35383