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Enron Mail |
Brad,
Here are my thoughts on your concerns. * You needs curve inputs. This is an IT job. I can help you for the curves before the system is properly set up. * Intrinsic value vs Time value: The intrinsic value depends on how you allocate the volumes. If you have a rough idea about the allocation as you did in the spreadsheet, we can calucate the intrinsic value within the model. The difference between the total and the intrinsic will be the (option) time value. However, by pre-allocating volumes, you killed some options. In the storage model, volumes are allocated dynamically, therefore it is hard to distinguish the intrinsic vs. time value. * Factor of loading: Factor of loadings are used to give historical correlation matrix. The three factors correspond to paralle shift, slopping and curveture. The covariance matrix in the model is expressed in the form COVAR = row( vol_{i} ) *( Correl(i,j) )* Colum( vol_{j} ) where vols are the implied volatilities from the vol curve. (Correl (i,j)) =L*L' +residue (small) where L is the factor of loading matrix. So in a simple words, the factor of loadings (say, 60x3) are a simplier way for us to remember the historical correlation matrix (say, 60x60). Let me know if I can offer further help. Zimin Brad Horn 02/15/2000 07:15 AM To: Zimin Lu/HOU/ECT@ECT cc: Sandra Henderson/HOU/ECT@ect Subject: Storage Model: Simple Issues Zimin: Thanks for your time with the revised storage valuation. Your right to point out the similarity to market bids. Here are some basic questions tied to implementation and calibration: Model Infrastructure/IT Support: I obviously need to re-build my link to the forward curves as the model is not working in my new location. Short-term (aprox 1 month), I'd like to establish a link to the ENA database EGSPROD32 in order to fetch the long-dated price and volatility curves. My link to ENA forward curves would then be quickly severed in favor of the curves generated by the new Bridgeline entity (database name and data structure yet to be defined). However, its not clear to me what is required in this two stage process to support your model. Any definition of model input or minimum support requirements you provide is appreciated. I'll then work with Sandra Henderson, an Enron employee providing our IT support, to ensure the model continues to work regardless any downstream system changes that may take place as we build and establish our separate trading systems or databases. Meanwhile, is there anything you think you can do to ensure Im up and running quickly? SANDRA: linking EXCEL spreadsheets to Bridgeline forward curves will be key to all our pricing projects, not just the storage model supplied by Research. Intrinsic vs Extrinsic Value: it would be helpful to decompose the model's calculated storage price and to distinguish intrinsic vs extrinsic (time or option) value. I could easily link a new spreadsheet tab to your model inputs and to calculate the intrinsic value, and then through a simple difference I could determine the extrinsic value. Ive included a simple spreadsheet calculation for the intrinsic value for review. I wanted to share this with you to ask the following: does the nature of the model define intrinsic and extrinsic value differently than the simple difference proposed? do you think it would make sense to do the simple value decomposition in the backcode C-code via .dll in order to ensure run-time is faster? My goal here is straightforward: a) to better understand the model and its sensitivities.; and b) to determine if and when the option approach is associating significant value above and beyond the simple present value of the time spreads. Factor Loadings: What are some of the thoughts or insights you can offer with regards to factor loadings and how I should interpret the graph of the 3 factors calculated? Factor loadings have always been a mystery to me. For example, what problems should I be looking for as a warning against mispricing? What, if anything, is implied about 1 day price change or expected curve re-shapings (after all, curve-reshapings are key to storage valuation!!!)? Calibration: we are preparing a simple summary of descriptive statistics which should allow me to refine some of the model inputs. I'll share the data when we are and model results once Im up and running.
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