Re: Compound Model for Reedy Creek

Stinson,

I think the gamma will flow into V@R.

Vince

Stinson Gibner
11/30/2000 06:14 PM
To: Alex Huang/Corp/Enron@ENRON
cc: Vince J Kaminski/HOU/ECT@ECT, Vasant Shanbhogue/HOU/ECT@ECT
Subject: Compound Model for Reedy Creek

Alex,

Paulo and I have continued to look at the model and have come up with a
couple of additional changes.

1. The cash flow calculations need to include the overlying option strike
payment. Also, Paulo is trying to clarify if the cashflows should be
discounted to the valuation date or reported as notional future values.
2. I would suggest trying changing the option valuation from a binomial tree
approach to a one-dimensional integration, perhaps using a quadrature
method. This may allow us to minimize the size of the delta discontinuities.
3. Edith is supposed to check and see if the theoretical gamma is used for
anything. If it is, we will probably need to revisit the gamma calculation
since we are not currently including any cross terms for gamma.

Thanks,

Stinson