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Enron Mail |
Michael,
The problem of the correct discount rate has not been correctly accounted for in RAROC. One solution is the real options approach which implies a risk-free interets rate, after ALL the risks of a project have been accounted for along multiple scenarios. It makes no sense to dink the same project twice for the same risks (once through adjustments of cash flows, "Michael SCHILMOELLER" <Michael_Schilmoeller@pgn.com< on 02/28/2000 12:20:18 PM To: VKamins@enron.com cc: Gmasson@enron.com Subject: RAROC Hi Vince, I just spoke with Grant about some RAROC issues, and he suggested I contact you. We are trying to understand how to convert pure risk adjusted return on capital to a hurdle rate, or risk-adjusted discount rate. I have never had the Enron RAROC training, but those who have say the training is vague on this point. At one time, Mark Rouen apparently had a utility curve that he had derived that related the two, but I understand Enron RAROC has subsequently abondonned that approach. Instead, they use a database of comparables and a lot of subjectivity to decide which projects get blessed. Do you have any resources you would recommend we consult on calculation of hurdle rates? Are we thinking about this correctly, i.e., are discounting cash flows according to risk-adjusted hurdle rate the correct approach? Are there any individuals in Houston we should speak with about the implementation of RAROC? Grant also alluded to your role in establishing RAROC at Enron and to the issue that there were some differences between your view of how RAROC should be implemented and the way it has been installed. Care to share? Thanks, Michael
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