Message-ID: <21749608.1075840576886.JavaMail.evans@thyme> Date: Mon, 27 Aug 2001 16:13:20 -0700 (PDT) From: john.griffith@enron.com To: george.huan@enron.com, eric.moon@enron.com, loftus.fitzwater@enron.com Subject: Storage Mime-Version: 1.0 Content-Type: text/plain; charset=us-ascii Content-Transfer-Encoding: 7bit X-From: Griffith, John X-To: Huan, George , Moon, Eric , Fitzwater, Loftus X-cc: X-bcc: X-Folder: \ExMerge - Griffith, John\Deleted Items X-Origin: GRIFFITH-J X-FileName: john griffith 6-25-02.PST George,Eric and Loftus, I think we should start with a simple storage model using the monte carlo simulation. Here is the way I think about the value. If I have a storage deal where I can inject baseload April-Oct and withdraw baseload Nov-Mar, that means I have a summer winter spread. If I go one step further and say that I can inject any 1 month and withdraw any 1 month then I have an option with intrinsic and extrinsic value. The intrinsic value is the largest spread of months (pv'd). The extrinsic value is the value that is obtained through rolling your hedges with other months get cheaper and more expensive than the hedged month. Example: Injection season - April through October baseload any 1 month Withdrawal season - Novemberr through October baseload any 1 month Month Price Vol April 3.09 45% May 3.11 40.75% June 3.154 38.25% July 3.204 38% August 3.249 38% September 3.25 38% October 3.265 37.5% November 3.42 37.5% December 3.59 37.5% January 3.68 37.5% February 3.565 36% March 3.446 34.25% Excluding pv issues, the value of this storage should be $3.68-$3.09=$.59 plus some extrinsic value. What is the extrinsic value? I think we should simulate prices for each month using the current implied vol and also some correlation from a correlation matrix that we build. Then with these simulations we calculate how much we would have made rolling hedges between now and the end of storage and the average of these simulations is the extrinsic value, right? Is this logical? Am I being too simplistic? Please let me know and maybe we can start with a model to price this. George why don't you start with a model that simply simulates price for the months and let me know what you need in order to do this. I think that the simulation is similar to a VAR calculation (vols and correlation ...) Thanks. John