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Enron Mail |
Amitava and Seksan have identified the source of the discrepancy between the
option prices calculated by the credit-reserve model and the stand-alone spreadsheet model used in deal pricing. The discrepancy can be traced to differences in input variables of the two models and not to any algorithmic differences. The options being priced are a strip of options on monthly instruments. The credit reserve simulation program calculates the time to expiration by assuming that the option expires on first day of the contract month of the underlying contract, which is a very reasonable assumption. The stand-alone option pricing spreadsheet allows specification of the option expiration date independent of the contract month of the underlying. In the JC Penney transaction, the monthly options were assumed to expire in the middle of the contract month, when in reality the underlying monthly contracts expire before the start of their respective contract months. The stand-alone spreadsheet model allows such specifications and it is up to the user to ascertain that the expiration dates entered are legal. At present, Seksan is ascertaining that the option contracts involved are in deed monthly options and not a strip of daily options, in which case we would require estimates of intramonth volatilities for both the spreadsheet model and the credit reserve model. Regards, Rabi De
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