Thanks for the comments Grant.  The presentation is for a couple of external 
conferences that Vince volunteered me for - Vince has OK'd the content, and 
Stinson raised exactly the same issues as you.  Unfortunately I just don't 
seem to be getting any response from RISK whatsoever on the publication of my 
article, so these conferences will be the public debut for my real options 
notation.

Of course the discounting/risk neutrality thing is where the real judgement 
sits.  When questions arise I'll take the line that while Research formulates 
the models using appropriate derivatives/market based valuation methods, we 
work with our RAC group which considers the discounting to be associated with 
various risks, and chooses these rates appropriately.  The notation makes 
clear which uncertainties we are exposed to at different stages of the deals, 
which assists in choosing the rates.

In practice I'm not yet at the stage where originators are using my notation 
yet - another reason I can't say too much about its actual use at the 
conference.  I'm producing various tools for deterministic hydro 
optimization, GBM swing option valuation, and deterministic DP optimization 
for genset dispatch which people want right now - I'm working in the 
background on the kind of modelling my notation demands.  People are getting 
to know me as a guy who can solve their immediate problems, and they'll be 
more likely to listen when  I start rolling out the "proper" options-based 
models.  My notation is currently used only in the specs I'm writing for the 
tools I'm producing.

I'll be turning Dale's spreadsheet-based power plant spread model into an 
American Monte Carlo tool, which will then be available for inclusion in 
other models.  I think by the end of the summer the real options theoretical 
work will start to bear fruit, one year after I initially proposed the 
notation.  With the quant IT group I'm co-creating in place, I may yet see 
the automated diagramming/pricing tool made real.

Thanks also for the pointer to Tom Halliburton.  The use of the LINGO 
LP/integer package is something I've been presented with for the Teesside 
plant operation optimizer, rather than something I chose.  The PERM (Physical 
Energy Risk Mgt) group just got a couple of analysts to hack it together 
(including Natasha Danilochkina), then asked me to tidy it up when it didn't 
work.  They are going to use their existing faulty model for now (to meet 
their project deadlines), and I'm sketching out a proper mathematical spec 
for the problem.

I've persuaded (!) them that this sort of business-critical system should be 
developed properly by Research, and they now seem happy to fall into line.  
Their Wilton plant optimizer was developed by one Peter Morawitz, the guy I 
hoped to recruit into Research, and they obviously didn't realise he was 
better than average at quantitative modelling.  Anyway they now accept that 
doing it properly will take months rather than weeks, and I'll have a freer 
hand in my choice of modelling tool - so a chat with Tom would be extremely 
valuable.

Cheers,
Steve




   
	Enron Capital & Trade Resources Corp.
	
	From:  Grant Masson                           05/15/2000 07:27 PM
	

To: Steven Leppard/LON/ECT@ECT
cc:  

Subject: Real options presentation

Steve:

I read through your presentation.  Looks good as expected.  Remind me; is 
this an internal Enron or external presentation? If external, I would say it 
is just at the limit before sliding into proprietary stuff.  Perhaps that's 
why you've neatly almost entirely avoided questions about discounting and 
risk-neutrality or lack of it?

Regards,
Grant.