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Vince ---------------------- Forwarded by Vince J Kaminski/HOU/ECT on 11/22/2000 09:36 AM --------------------------- Pinnamaneni Krishnarao 11/22/2000 09:25 AM To: David Draper/HOU/EES@EES cc: Vince J Kaminski/HOU/ECT@ECT Subject: Re: American type swaption calculations. David: On #1, I would say the problem is not with the calculation part, but with the market information, or lack thereof (i.e., illiquidity). The gas desk is responsible for the supplying prices and volatilities. It is upto them to decide how they want to account for illiquidy: change the bid/offer spreads accordingly, or add hedging costs, or something else. And on the correlations, they do matter but not as much as volatility or price. Since these are correlations for the same underlying at the same location across time, I think we can make some reasonable assumptions and compute them. Regarding #2, I don't agree with the concept of a market top. What the desk does with the options is to hedge them. And the way to hedge them is hedge teh delta and exercise the options optimally at the same time. Finally, I don't think we can use a 2-year swap as a proxy for a 10-year swap. Longer term prices and volatilies are driven by the cost of production and economic variables and their uncertainities. Those don't necessarily reflect the shorter term issues. Have a great Thanksgiving, Krishna. David Draper@EES 11/21/2000 02:00 PM To: Pinnamaneni Krishnarao/HOU/ECT@ECT, Paulo Issler/HOU/ECT@ECT cc: Subject: American type swaption calculations. Krishna/Paulo, Can you gentlemen do me a favor and read the attached memo written by Eugene and give me your opinion ? Thanks. Hope you have a great Thanksgiving weekend. ---------------------- Forwarded by David Draper/HOU/EES on 11/21/2000 01:58 PM --------------------------- Eugene Zeitz 11/21/2000 09:34 AM To: David Draper/HOU/EES@EES cc: Subject: American type swaption calculations. Hi, Dave: Here's a write-up on our problems with American style options. Thanks. Eugene.
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