Message-ID: <15117999.1075855881922.JavaMail.evans@thyme>
Date: Fri, 8 Sep 2000 02:47:00 -0700 (PDT)
From: ted.murphy@enron.com
To: sally.beck@enron.com
Subject: Four New Graphs
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X-From: Ted Murphy
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Sally,
  While I think it makes sense for this type of information to be available, 
that it should be done by Operations, and that Eugenio has the skills and 
knowledge to articulate it well, I have some concerns.   First and foremost, 
the process of creating a standard risk metric belongs to RAC, I believe.  To 
me this is no different than VAR, or the Capital Pricing methodololgy, or the 
RAROC process.   This has been published without even a review from our 
group, which I think is inappropriate for two reasons: 1) we might disagree 
and, as stated above, I think we have the final say, and 2) we can't quality 
control it and all the reciepients think that I have.  Second, this has been 
developed in isolation when in fact we have been doing similar things for the 
past 2 years. We report these to the Board and have published to the Desk 
heads on a monthly basis returns by trader.  Clearly, there could have been 
some benefit in each direction if we were told that this was a goal of this 
group, particularly when we fundamentally agree that this group should be 
doing these things.  Thirdly, it is a little irritating when someone sets up 
a process in isolation for what may appear to be "show-time" when my group is 
spending hours and hours analyzing the output of existing process because the 
data integrity is so bad (double mapping of portfolios, books not 
officialized......) - we have at least attempted to take both parts of the 
equation, Eugenio has chosen to focus on the cool part.  Now I would be a 
little less concerned if on almost every day, Eugenio wasn't in my morning 
meeting contributing virtually nothing, i.e., this doesn't appear to be 
oversight on his part.

I would prefer to not make a big deal out of this, but rather take it as an 
opportunity to clarify and shift some responsibilities.  In the big scheme of 
things it is a move in the right direction.

Penny for your thoughts
Ted
---------------------- Forwarded by Ted Murphy/HOU/ECT on 09/08/2000 09:23 AM 
---------------------------


Eugenio Perez
09/07/2000 05:17 PM
To: John J Lavorato/Corp/Enron@Enron, John Sherriff/LON/ECT@ECT, Jeffrey A 
Shankman/HOU/ECT@ECT, Ted Murphy/HOU/ECT@ECT, Mark Frevert/NA/Enron@Enron, 
Rick Buy/HOU/ECT@ECT, Sally Beck/HOU/ECT@ECT, Shona Wilson/NA/Enron@Enron
cc: Michael E Moscoso/HOU/ECT@ECT, Maria Teresa 
Aguilera-Peon/Corp/Enron@Enron, Jennifer Nguyen/Corp/Enron@ENRO 
Subject: Four New Graphs

We have created four additional graphs to be published daily along with the 
DPR: 

Return on VaR (ROVAR)
Curve Shift P&L (Delta - Gamma) Sharpe Ratio
Risk - Return (Large)
Risk - Return (Small)

All of these graphs deal with the concept of risk-adjusted return.  The 
markets in which we operate have unlike risk characteristics.  Furthermore, 
Enron's appetite for risk also differs in each market.  As a result, it is 
difficult to compare returns in absolute terms.  Therefore, the approach of 
these graphs is to divide return by a measure of risk, in effect restating 
return numbers into a standard base (how many dollars we earn for every 
dollar we put at risk).


 For each business unit or commodity group, the ROVAR graph shows an average 
of daily total P&L divided by an average of daily VaR.  Higher ROVARs 
indicate better performance (relative to other business units).  For each 
business unit or commodity group there are two bars: the dark blue on the 
left shows ROVAR on a 4 week (20 business day) rolling basis, and the light 
blue on the right shows ROVAR on a 1 week (5 business day) rolling basis.  
Because of the shorter term, the 1 week ROVAR is more sensitive: it can be 
quite high or low, and it changes frequently.


The Sharpe Ratio graph is very similar in concept; it shows an average of 
daily curve shift P&L (both delta and gamma) divided by its standard 
deviation. This Sharpe ratio is uncomplicated by non-trading P&L (like new 
deals, reserves, and so forth).  Furthermore, whereas VaR is a forward 
looking statistic (the most we are likely to lose in one day with a given 
probability), standard deviation is backward looking (the actual volatility 
of our returns over the period). This graph also has two bars for every 
business unit or commodity group: a dark brown on the left showing the Sharpe 
ratio on a 4 week rolling basis, and a light brown on the right showing the 
ratio on a 1 week basis.

The Curve Shift P&L Sharpe Ratio and the ROVAR graphs complement each other 
well.  They measure different things, but if our P&L is composed mostly of 
curve shift, and if our VaR closely predicts curve shift volatility, the two 
statistics should be very close.


Sometimes it is interesting to see the actual magnitude of the P&L relative 
to the risk.  We therefore put together the Risk - Return graphs.  On the 
vertical axis, they show 4 week rolling average P&L.  On the horizontal, they 
show 4 week rolling average VaR.  The various business units are plotted as 
points on the graphs.  These graphs are closely related to the 4-week ROVARs, 
in that the vertical value of every point divided by its horizontal value is 
the business unit's ROVAR (average P&L / average VaR).  Another way of 
looking at these graphs is that the slope of a line connecting the origin 
(0,0) with the plotted point of a business unit is its ROVAR.  Books with 
small risks and returns (< $2 million) are plotted on the "Small" graph, and 
the rest, on the "Large".

These graphs are based on the DPR Database that we built to standardize and 
capture the information that is reported in the DPR.  Most, but not all of 
the information in the DPR currently flows from the database.  As a result, 
we do not have ROVARs or Sharpe Ratios for every business unit.  As we 
continue to set up exports into the database, we will fill in the missing 
numbers.

We will e-mail you these graphs every day until we can publish them on the 
intra-net.  Please remember to launch the file in Excel, instead of using the 
Lotus Notes viewer.  The VaR Limit Usage graphs that we created last week are 
already on the web.  We hope that you find all of these useful.



Regards,



Eugenio Perez