Subject: VaR
From: [email-masked]
To: [email-masked]
Cc: [email-masked], [email-masked], [email-masked]
Date: Wed, 11 Apr 2001 17:48:00 -0700 (PDT)

David,

During today's VaR coordination meeting  we had a discussion of issues 
related to mapping of the forward price curves into core locations.

Mapping is a  necessity dictated by the limitations of the computer system:
we have to reduce the dimensionality of the problem to stay within the bounds
of available CPU memory. Also, in some cases the quality of price discovery is poor 
and it's difficult to model the price curves independently: we solve the problem by mapping
them into more liquid and better behaved core  locations curves.

We have agreed on the following:

1. Winston will investigate the IT side and determine to what extent we can increase the number
of forward price curves that are simulated as basic (core) curves. He will investigate the impact of a larger
number of the core curves on the time required to complete the VaR run.

2. The curves associated with the biggest 10-20 positions in each commodity should be
modeled as core curves (i.e. no mapping into other locations). It makes sense to monitor
the biggest risks separately and avoid aggregating them into  less transparent aggregates.

3. The results of an automated clustering (mapping) procedures should be systematically
monitored by a human and corrected if they misrepresent the risks of the trading positions.
This responsibility should be vested with one person (right now the responsibility is
dispersed through the organization and this means in practice that nobody
is responsible). Research can allocate one person to this task;
cooperation of trading and RAC will be critical.

Vince