Michael,

The problem of the correct discount rate has not been correctly accounted for
in RAROC. One solution is the real options approach which implies a risk-free
interets rate, after ALL the risks of a project have been accounted for
along multiple scenarios. It makes no sense to dink the same project
twice for the same risks (once through adjustments of cash flows, 




"Michael SCHILMOELLER" <Michael_Schilmoeller@pgn.com> on 02/28/2000 12:20:18 
PM
To: VKamins@enron.com
cc: Gmasson@enron.com 
Subject: RAROC


Hi Vince,

I just spoke with Grant about some RAROC issues, and he suggested I contact 
you.

We are trying to understand how to convert pure risk adjusted return on 
capital to a hurdle rate, or risk-adjusted discount rate.  I have never had 
the Enron RAROC training, but those who have say the training is vague on 
this point.  At one time, Mark Rouen apparently had a utility curve that he 
had derived that related the two, but I understand Enron RAROC has 
subsequently abondonned that approach.  Instead, they use a database of 
comparables and a lot of subjectivity to decide which projects get blessed.

Do you have any resources you would recommend we consult on calculation of 
hurdle rates?  Are we thinking about this correctly, i.e., are discounting 
cash flows according to risk-adjusted hurdle rate the correct approach?  Are 
there any individuals in Houston we should speak with about the 
implementation of RAROC?

Grant also alluded to your role in establishing RAROC at Enron and to the 
issue that there were some differences between your view of how RAROC should 
be implemented and the way it has been installed.  Care to share?

Thanks,
Michael