Update: FFVols

Ted,
An update on the implementation for FFVols:
(1) In comparing 6 days of historical Var calculations
(with that of the implied) for Agg-Gas, we have found that the Historical VaR
calculations are consistently lower over this period, by roughly 17 MM. The
implied volatilities are much higher at this period, anticipating strong
winter prices.
(2) At this time, the consensus is not to relase the
historical implementation into production, and the official line to traders
will be that the method is still in testing. The historical VaR is 19.2MM
and the implied is 37 MM for effective date of 09/25.
(3) Further testing is in progress on a hybrid methodology
(which I mentioned last week, whereby historical vols are scaled by the ratio
of prompt to historical-prompt volatilities), to atleast capture some
implied/forward effects. Tanya's analysis on a fictitious portfolio
indicates higher VaR numbers, but poorer backtesting in comparison to the
historical approach. This approach serves as an intermediate, and seems
appropriate in periods such as the current one, wherein the historical
numbers might be considerably lower than those of the implied.
(4) Winston will start testing using these hybrid vols, and
if the results are deemed satisfactory, that will be the production
methodology.

Of course, we will obtain all VaR numbers concurrently to serve as different
indicators and beacons of risk. The production number will hopefully be a
sensible compromise of the different methods.

Regards
Naveen