Subject: New Volatility Curve Generator for UK Power
From: [email-masked]
To: [email-masked], [email-masked], [email-masked], [email-masked], [email-masked], [email-masked]
Cc: [email-masked], [email-masked], [email-masked]
Date: Wed, 22 Dec 1999 09:18:00 -0800 (PST)

We have established a set of power volatility curves down to the EFA/monthly 
level of detail that can be marked to market up to 6 years out.  Beyond this, 
the volatility decays to what we understand to be the long-term level for 
power volatility, given our understanding of the behaviour of forward prices 
over large time-scales.

The swaption traders can now fit the first 5-6 years of the volatility curve 
to the market-observed baseload swaption implied volatilities (typically 3 to 
12 months duration for the underlying swap) and then be in a good position to 
price other swaptions (including swaptions on individual EFA slots) 
consistent with the curve.  There may also be an impact on the daily VaR 
calculation.

An illustration of the current volatility curves is pasted below:-

These curves will be reset as the market moves, and allow a mark-to-market 
approach to be followed for our volatility book.  The spreadsheet model is 
saved in T:\READWRTE\ELEC_UK\MODELS\VOLCURVEGENERATORNEW.XLS and also 
attached below for Houston staff to review.

[Stinson - I'd be grateful if you could offer an opinion/audit to ensure that 
I haven't missed anything, thanks.]

Regards,

Anjam 
x35383