Re: Alex's paper

Comments:

1. In the sentence between eqn. 3 and eqn. 4, I think "annualized
volatility" should replace "annualized standard deviation."

2. As to the comment, "Immediately we see something quite
counter-intuitive." I would disagree. I think that its quite intuitive
that this model should get closer to the Black-Scholes price as what is
defined as the "jump" component becomes just part of the main price
distribution, which happens if we define a jump to be only a 1-sigma
event. The table does show, however, that the results of using this model
are very sensitive to exactly how you choose to define a "jump" (i.e. 2-sigma
or 3-sigma... events), and this is one difficulty in using the model in
practice.

3. In the paragraph after the table, I don't understand the argument about
hedging the option. Especially about buying a swap which would pay on the
difference between the strike and Fs. This seems non-sensical.

4. I could not follow the logic of the last two sentences of the article, so
this point should probably be explained more clearly.

--Stinson

Vince J Kaminski
08/18/2000 08:15 AM
To: Grant Masson/HOU/ECT@ECT, Stinson Gibner/HOU/ECT@ECT, Alex
Huang/Corp/Enron@ENRON
cc:
Subject: Alex's paper

Minor changes I made to Alex's paper.

Vince