FYI -
 
Jennifer Stevenson at Andersen may be calling you all to try and verify something to assist us with our dual trigger accounting arguments.  We have been trying to prove to Andersen that the value in the dual trigger option lies more in the price volatility than the physical plant outage.  AA was perplexed by the approximate 50% margin on these deals.  Larry Marcus pointed out to them that this isn't any different than an out of the money call option which would also typically generate a 50% margin.  They believe that it will greatly help our argument if they can verify with a trader that this is true.  Let me know if you have any questions.  Thanks.
 
Mary
 

 -----Original Message-----
From: Williams, Karin 
Sent: Monday, October 22, 2001 8:07 AM
To: Cilia, Mary
Subject: FW: status of CCO book accounting treatment


David Hoog recommends that Jennifer and Patty talk with Harry Aurora.  K

 
 
 
 
 -----Original Message-----
From: Hoog, David 
Sent: Saturday, October 20, 2001 11:27 AM
To: Williams, Karin; Marcus, Larry
Cc: Sekse, Per; Price, Brent A.; Glover, Sheila
Subject: RE: status of CCO book accounting treatment


if a call option is way out of the money, such as the ones we purchased last summer, the premium is a multiple of the "expected" payout.  a trader may not respond well to the term "margin" because they dont calculate it. as an example, if the midmarket value for a $100 power call is $2.50, and a $500 call is expected to pay 40% as much, a trader would offer this illiquid instrument for $2, which would be like a 50% margin.  one problem with this analogy is that expected value of payout is frequently much lower than the midmarket because there are very few arbitrageurs in this market who can really take advantage of that.  this example does support the statement, but a trader will not think about it the same way.  they will not call this extreme vol smile on illiquid products a high margin.  harry arora would be the trader to talk to.

-----Original Message----- 
From: Williams, Karin 
Sent: Fri 10/19/2001 4:29 PM 
To: Hoog, David; Marcus, Larry 
Cc: Sekse, Per; Price, Brent A.; Glover, Sheila 
Subject: status of CCO book accounting treatment


Patty Grutzmacher and Jennifer Stevenson (both Andersen) were scheduled to review our pricing model with Tom Bauer (Andersen partner) this week.  Due to issues relating to the Enron shareholders' lawsuit,  Tom could not meet with them.   Patty and Jennifer did have further discussions with Amitava and Vasant.   They are all right with the model.
 
Larry - 
Patty / Jennifer want to confirm your statement that a 50% margin on an out-of-the-money call option is not unusual.  They have asked Stacey White (Director of Power Risk Mgmt) to recommend a power trader with whom they can talk.  If you know of a person you would like them to talk with, please let me know.
 
Mary Cilia (transaction support) has asked Jennifer and Patty not to push the issue with Tom Bauer until he is in a more receptive mood.  We are still anticipating a resolution this quarter.   I will continue to keep you informed.  
 

Karin Williams

713-345-8026 
713-594-4978 (cell phone)