Hi Paul/Cassim,

Further to our meeting yesterday regarding power options, that we may use to 
capture short-term volatility from regulatory caps being adhered to or 
broken, I have attached a spreadsheet that should assist in nailing down the 
value.

ARBITRARY DISTRIBUTION
The first issue to address is converting the price scenarios for the average 
of the Q2-Q3 swap into a volatility equivalent.  This is achieved by fitting 
a normal distribution that matches the one specified for mean and standard 
deviation.  The graph below illustrates the method for the numbers discussed 
yesterday.  In this example, the annualised volatility is coming up as 
approximately 23%.



PRICING & IMPLIED VOLATILITY
The pricing is as for a regular Asian option.  The payoff depends on the 
average of the daily prices for Spanish power for Q2 and Q3.  The valuation 
using 23% volatility is showing about 15.3 Pta per kWh.

I will schedule a meeting to allow us to take this forward.

Regards,

Anjam
x35383

SPREADSHEET: