Hi Dutch --

Since you offered to answer some of my questions over e-mail, I will take
you up on it!    I would still like to get some of your time Monday or
Tuesday to go into more detailed discussion.

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?

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?


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

Thanks so much for your time, Dutch.

Have a terrific weekend!
Ann


This message is for the designated recipient only and may contain
privileged or confidential information.  If you have received it in error,
please notify the sender immediately and delete the original.  Any other
use of the email by you is prohibited.