Re: UK Power/Gas

Vince, just FYI:
Oliver (Risk Control in London) was asking if it is appropriate to use a set
of factors corresponding to some commodity for another commodity.
This "mapping" we do quite frequently in our VAR system when forward prices
for a commodity are not correlated (because of poor price history).

I think using this kind of mappings is OK because we can not trust these
correlations based on illiquid price information.
If we believed the matrix with low correlations represents what goes on in
the market and we simply can not reconstruct it with our 7 factors - then
we might use more factors then 7 or the matrix itself.

Tanya

Tanya Tamarchenko
12/15/2000 02:36 PM
To: Oliver Gaylard/LON/ECT@ECT
cc: David Port/Market Risk/Corp/Enron@ENRON, Rudi Zipter/HOU/ECT@ECT, Wenyao
Jia/HOU/ECT@ECT, Kirstee Hewitt/LON/ECT@ECT, Debbie R Brackett/HOU/ECT@ECT,
Naveen Andrews/Corp/Enron@ENRON
Subject: Re: UK Power/Gas

Oliver,
I completely agree with you: validating VAR inputs like positions, prices and
volatilities which are used by RisktRac is the first thing to do.
You also rise a valid question: if the factor loadings for some commodity do
not make sense should we use the factor loadings for another commodity?
The factor loadings "do not make sense" when the correlations across the term
structure are not high. So if we believe that the forward prices for this
commodity are market prices and statistical analysis on these prices produces
the correlations which we trust, then it would be proper to use this
correlation matrix in VAR engine, not the factors. Using factors is simply
the way to speed up calculations for highly correlated prices without
sacrificing the accuracy.

Tanya.

Oliver Gaylard
12/15/2000 07:11 AM
To: Naveen Andrews/Corp/Enron@ENRON
cc: David Port/Market Risk/Corp/Enron@ENRON, Rudi Zipter/HOU/ECT@ECT, Wenyao
Jia/HOU/ECT@ECT, Kirstee Hewitt/LON/ECT@ECT, Tanya Tamarchenko/HOU/ECT@ECT,
Ganapathy Ramesh/HOU/ECT@ECT, Debbie R Brackett/HOU/ECT@ECT
Subject: Re: UK Power/Gas

Naveen

Regarding the calculation of UK VaRs in Risk Trac I agree that we should be
using this calculation engine for all commodity VaRs. However we should not
focus solely on the UK but ensure that we use Risk Trac for continental power
and gas, UK power and gas, Nordic Power.

To use Risk Trac I think the following need to be resolved first, to
implement it "right the first time", as I think it is incorrect to consider
the Risk Trac numbers "As the most accurate" since it depends on the validity
of these items:

Positions (Delta and gamma) and curve mapping - These need to include all
positions including those outside the main risk systems
Positions, curves and mapping should now be no problem given the feeds,
apart from continental power, have been UAT'd and we have the spreadsheet
feeds up and running.

Price and vol curves - As used by the risk systems
As above

Inter commodity correlation - prompt month
Correlation should be easy to calculate given an accurate and complete data
set (However the incomplete historic data for Europe in Risk Trac, prior to
the formation of the task force, would mean a full data set needs to be
obtained and used). Term structure of correlation would be good but I
understand this is difficult to use in the calculation.

Factor loadings
I think factor loadings should be calculated, on the same data sets used
for inter commodity correlation, for all commodities. If this analysis does
not appear to work I am not sure that using factor loadings for other markets
is adequate. Do we need to consider an alternative approach to calculating
VaR for these markets?

To ensure this moves forward I think a list of the mile stones,
responsibilities and time lines needs to be drawn up otherwise I fear the
process of moving across to Risk Trac from the spreadsheet VaR will
experience some slippage.

I will call today to start the process off.

Rgds

Oliver

Naveen Andrews@ENRON
06/12/2000 21:50
To: Oliver Gaylard/LON/ECT@ECT
cc: David Port/Market Risk/Corp/Enron@ENRON, Rudi Zipter/HOU/ECT@ECT, Wenyao
Jia/HOU/ECT@ECT, Kirstee Hewitt/LON/ECT@ECT, Tanya Tamarchenko/HOU/ECT@ECT,
Ganapathy Ramesh/HOU/ECT@ECT, Debbie R Brackett/HOU/ECT@ECT

Subject: UK Power/Gas

Oliver,
I had a couple of issues pertaining to UK Power/UK Gas. First,
just a few notes as it pertains to Risk Trac UK-implementation:

(1) In RiskTrac, currently all the Gas Curves are mapped to NBP.
(2) All the Power Curves are mapped to R4 (Cinergy).

Factor loading analysis lends itself only to NBP and the Norewgian curves(for
reasons of liquidity, etc). We have decided that NBP and Cinergy are the
best curves available at this time.
The spreadsheet which is utilized in the UK also has curves mapped to a
2-3-year old set of Factors derived from US Nat Gas, which is clearly not
optimal. Hence

(1) We should be using RiskTrac numbers for VaR, as it is the "most
accurate", both in terms of ENE-wide model usage and in terms of the most
recent updated data. Ever since UK Power came on board in RiskTrac 3 weeks
ago, the UK Power number has been consistently 7-8MM above the numbers in
your spreadsheet. This difference is to be ecpected, given the different
inputs.
(2) The consistent numbers do not point to a data error in any obvious way,
however, if you believe that positions are not captured correctly, please let
our IT staff know that.
(3) Checks which Ramesh has done indicate that positions are tying in.
However, as you know, there could be disconnects with Enpower, etc.

In any event, it would be ideal and optimal to have all the simulations run
out of RiskTrac for reasons of aggregation and analysis.
Your help is appreciated.

Regards
Naveen