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Enron Mail |
FYI
Vince ---------------------- Forwarded by Vince J Kaminski/HOU/ECT on 02/12/2001 11:22 AM --------------------------- Eugenio Perez 02/08/2001 01:13 PM To: Vince J Kaminski/HOU/ECT@ECT, Stinson Gibner/HOU/ECT@ECT, Rudi Zipter/HOU/ECT@ECT cc: Subject: New Merchant Asset VaR Model I was recently informed of a risk-reducing strategy that we have on the Merchant Asset portfolio. It seems that we have a vertical bear spread hedging our holdings of Hanover Compression. Since these holdings represent about 10% of the porfolio, I felt that parametric VaR would not be accurate enough. As a result, I have changed the model to a Monte Carlo simulation with the following details: Following my conversation with Vince, I changed the method of parameter estimation to RiskMetrics standard (assume a zero mean and estimate daily volatilities and correlations using exponential weighting with a 0.94 lambda). I use the Cholesky decomposition to produce correlated random normals, which I then use to simulate Geometric Brownian Motion prices. I treat the Hanover Compression stock holding and bear spread together as a synthetic short put at 34 and long call at 92. I do full revaluation of the options with the Black-Scholes. I keep volatility and the interest rate constant for the sake of computational speed. I write my Monte Carlos through VBA and formulas in Excel, so this model does not need Crystal Ball. Regards, Eugenio
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