RE: Cross-commodity desk

Andy,

I see two ways to do cross-commodity trading that would add value:

The first one is to do proprietary trading, trying to find opportunities among markets. Prices in one market may not reflect the proper relationship with other market.
Develop products for our customers that manage their total risk. But, in real life, many times the risk of a client is a risk of combination of different commodities that have their prices depending on one another. The solution for this problem would be a desk within Enron to trade dynamically positions with the other desks, replicating this risk.

Note that the second will depend on the first.

In terms of weather, we have been developing products that address the volume risk of commodities. Normally people are exposed to the product volume*price. So, we have been thinking solutions for volume risk with variable prices (what we call quantos). The solution of this product requires dynamic trading of the commodity and the weather as well. These products are close to my second bullet point.

Your example is what we call the gas product with a second trigger in weather. They are possible and very important for the market at this point. The good thing about this one is that the easiest way to achieve it will be implementing the first bullet point, the second bullet point comes as consequence.

Feel free to ask us questions about the weather piece and its interaction with commodities. If we do not know, it will be very interesting to research the answers.

Thanks,

Claudio

-----Original Message-----
From: Zipper, Andy
Sent: Wednesday, June 06, 2001 11:42 AM
To: Ribeiro, Claudio
Subject: RE: Cross-commodity desk

Claudio,

I am still in the process of setting up what we are going to look at and how, but it will very definitely be options focused. I think the three major drivers we will care about will be Gas, Power, and weather. I am particularly interested in the relationship of how gas and power prices react with weather. One trade I am interested in is gas daily options that knock-in based on an observed temperature for the particular delivery point. What are your views and what would you focus on if you were me ?

Thanks
Andy