Spanish Power Option Pricing

Hi Paul/Cassim,

Further to our meeting yesterday regarding power options, that we may use to
capture short-term volatility from regulatory caps being adhered to or
broken, I have attached a spreadsheet that should assist in nailing down the
value.

ARBITRARY DISTRIBUTION
The first issue to address is converting the price scenarios for the average
of the Q2-Q3 swap into a volatility equivalent. This is achieved by fitting
a normal distribution that matches the one specified for mean and standard
deviation. The graph below illustrates the method for the numbers discussed
yesterday. In this example, the annualised volatility is coming up as
approximately 23%.

PRICING & IMPLIED VOLATILITY
The pricing is as for a regular Asian option. The payoff depends on the
average of the daily prices for Spanish power for Q2 and Q3. The valuation
using 23% volatility is showing about 15.3 Pta per kWh.

I will schedule a meeting to allow us to take this forward.

Regards,

Anjam
x35383

SPREADSHEET: