Transport

Hey Colleen, how are thing going? I haven't talked to you in a while.

I was trying to tie out a transportation deal in the books with my transport
model. I found that the transportation spreadsheet that the books are being
closed out with was valuing extrinsic value over what my model valued it. I
reconciled the differences and the main difference was due to the blending of
the volatilities. I brought this problem up back in October of this year.
Do you remember? When I talked to Greg Couch today, those changes were not
made. I think that it is an issue with all the transportation deals.

The problem is related to the number of days that is used to weight the
daily/omicron volatility. Basically, transportation is a daily spread option
and if you look at a month like November for instance, you have 30 different
daily options. If you were to look at the number of days that the
daily/omicron volatility should be used you would have the first option with
1 day of daily vol, the second with 2 days of daily vol, the third with 3
days of daily vol and so on and so on. The average number of days that
should be used to weight the daily/omicron volatility is 15 or the number of
days in each particular month divided by 2. The transportation spreadsheet
is weighting that volatility with the total number of days in the month.
This usually overstates the extrinsic value since that the daily/omicron
volatility is usually higher than the monthly volatility.

Please let me know what you would like me to do. I have a call into Zimin to
make sure that my logic is correct. Thanks.

John Griffith
x.36247