Message-ID: <30631388.1075852268998.JavaMail.evans@thyme>
Date: Mon, 22 Oct 2001 09:45:51 -0700 (PDT)
From: dutch.quigley@enron.com
To: ann.s.chen@accenture.com
Subject: RE: Questions for the Simulation Model
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Question 1:
When we talk about "the market" reacting to events, what are the prices
that we are talking about? From a simulation standpoint, I am trying to
figure out what prices we need to show as being affected by these many
events.  Is it the forward curve? Is it the spot market price?  Is the
bid/offer prices for the various instruments? And, if we are having users
trade basis, we will need different prices for different locations, right?

[Quigley, Dutch]  
for each event we need to build a change matrix that will change the previous price curve to a new one
depending on each event it could change all parts of the sport and forward curve

Question 2:
Given that the calculation of VaR is rather involved, we decided that it
would not be worth our effort to have that calculation in the model.
However, we understand that the user needs to 1) know their VaR and 2) know
that they need to make sure they stay within their VaR limit.  So, we will
need to set a VaR limit for the user and "fake" the individual VaR to
reflect their risk exposure.

I had a talk with Erro McLaughlin about this.  He made a good point that if
our user are not expected to understand the complexity of how a VaR is
calculated, will they know how to control their VaR, i.e. if a user sees
that he is over his VaR limit, what should he do to get it back within the
limit.  Is is as simple as not being too long or too short? And if that is
the case, would it be sufficient to use position reports/tallies as a proxy
for risk exposure, instead of VaR?

One possible way to fake VaR may be to adjust the VaR number to reflect how
exposed the user is. So if they are X dollars long, they have a VaR of Y.
If they change their position so that they are now 1.5X long, they have a
VaR of 1.5Y.  Perhaps we can also throw in a factor that takes into account
market volatility.

What are your thoughts?

[Quigley, Dutch]  
Instead of a VaR number we could set position limits that they must stay within at all times
i.e. over all position can not be outside a set range , NYMEX Risk can not exceed +/- 500 contracts
Basis & Index Risk can not exceed +/- 1000 contracts so for and so on 
Therefore not having to calculate VaR and expect the user to understand what to do to stay with in limits




Lastly, when could you meet with me next week? I would really like to meet
on Tuesday, if possible.

[Quigley, Dutch]  
can you check with your team , I am to meet with them on Monday and Tues. so see if you can squeeze into one of the times or we can make a new one

Dutch