Re: smoothing methodology for extracting forward forward

Cc: naveen.andrews@enron.com, vince.kaminski@enron.com,
debbie.brackett@enron.com, rabi.de@enron.com, jaesoo.lew@enron.com
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Winston,
here is a document related to smoothing methodology for FF vols calculation.
I am sending you also a spreadsheet prototype model with examples for gas and
power.
Fitting in the spreadsheet is done with "Solver".
I'll figure out how to implement minimization in the code.

Thank you,
Tanya.

Tanya Tamarchenko
11/17/2000 02:59 PM
To: Naveen Andrews/Corp/Enron@ENRON, Alex Huang/Corp/Enron@ENRON
cc: Vince J Kaminski/HOU/ECT@ECT, Vasant Shanbhogue/HOU/ECT@ECT, Vladimir
Gorny/HOU/ECT@ECT
Subject: Re: smoothing methodology for extracting forward forward
volatilities

Following up on our discussions I implemented one method for creating forward
forward curve
from implied vol curve.
I sorted out 12 forward curves from an original forward vol curve, each of 12
curves corresponding
to certain month. Then I fitted each of 12 curves with a function:

y=a+A/power(x+b, beta)

I figured out that when beta is from (0, .5) the above function is suitable
for performing our bootstrapping
routine of deriving ff vols from implied, because:

y(x+t) * y(x+t) * (x+t) - y(x) * y(x) * tx< 0 for all x, t.

(I have to double check on this again. Also when beta<0.5 there are some
combinations of parameters a, A, b, beta
for which above equality holds). Even with restriction on beta this class of
functions represents quite a variety of shapes.

Below you see the example of fitting as well as the example of ff vol curve
constructed from implied vol curve for NG.

I'll try this for power as well.

Any comments?