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From: "Dean Tallam" <dtallam@numerix.com>
To: <vkaminski@aol.com>
Subject: NumeriX Solutions for Enron
Date: Fri, 6 Apr 2001 16:16:40 -0400
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Vincent,

?

It was good speaking with you this afternoon. 

?

NumeriX provides versatile solutions for the pricing and risk management of 
complex derivative instruments. Of particular interest to Enron may be the 
use of NumeriX Tools for supporting energy derivatives. 

?

The energy solution provided is a versatile Excel/C/C++ environment for 
structuring and pricing complex derivatives in the electricity marketplace. 
The model is based on a microeconomic determination of one or multiple 
electricity forward curves. Power demands by utility companies are balanced 
with power generating plants'?production to determine the marginal price of 
electricity for multiple geographic regions. Inter-regional transmission 
constraints are imposed to calculate monthly forward prices for border 
stations. 

?

The?energy solution is based on Monte Carlo simulation. The regional power 
demands and fossil fuel prices are modeled as random processes where model 
parameters are determined from historical data. Marginal prices from 
different regions are used to determine border prices. This procedure is 
iterated over many scenarios and subsequent averages are taken to determine 
the forward COB prices.

?

I. Overview

NumeriX is a leading provider of?modular analytical toolkits and 
off-the-shelf applications that are used for structuring,?pricing 
and?quantifying the risk?of any?type of complex?financial instrument?or 
exotic derivative.?NumeriX solutions are designed for easy integration with 
existing in-house or third-party trading or risk management applications. 
NumeriX solutions include:

NumeriX Tools 
NumeriX FI 
NumeriX FX 
NumeriX EQ

Some of the key benefits of NumeriX solutions include:

Support for all asset classes 
Fixed Income Instruments 
Equity Instruments 
Foreign Exchange Instruments 
Commodity Derivatives 
Credit Derivatives 
Insurance Products
Ability to value any complex?financial instrument?or exotic derivative 
Increased instrument-valuation precision 
Leading-edge valuation models and calibration routines 
Enhanced risk management solutions 
Stable development platform for building pricing and riskmanagement solutions?

II. NumeriX Analytics

?

NumeriX?provides comprehensive solutions?that feature advanced tree, 
simulation (Monte Carlo), stochastic mesh and calibration methods for the 
following models:

One-factor models: 
Hull-White/Extended Vasicek 
Black-Karasinski 
Black-Derman-Toy 
Black-Scholes
Multi-factor models: 
Multi-factor Hull-White 
Multi-factor Black-Karasinski 
Brace-Gatarek-Musiela/Jamshidian

NumeriX provides a Monte Carlo methodology that employs leading-edge 
technology with the following features/benefits:

Increased accuracy and faster convergence 
Better sampling of tail events 
Adaptive number generation 
Points do not cluster or leave voids 
Support for correlated sequences 
Generates normal and lognormal sequential processes or 
concurrent?distributions with optional continuous or discrete bounds 
Supports public domain and NumeriX developed sequence generators

III. NumeriX Tools

?

NumeriX Tools is a suite of innovative development tools that provide speed, 
flexibility and ease of use for all aspects of derivatives pricing and risk 
management, including building new instruments and new models. A collection 
of object-oriented modules accessed through a well-designed interface 
available in C or C++, it includes core mathematical and computational 
functions required for complex derivatives pricing and risk management.? 
NumeriX Tools supports all financial asset classes and is designed to 
maximize flexibility and minimize development and computation time, each 
component of the NumeriX Tools integrates many cutting-edge algorithms into 
one intelligent, easy-to-use API. 

?

IV. NumeriX Applications

?

NumeriX FI, designed for traders and risk managers, is a comprehensive and 
flexible off-the-shelf application for structuring, pricing, and quantifying 
the risk of any type of complex fixed-income instrument, interest-rate 
derivative, or exotic structure. NumeriX FI offers flexible and robust 
instrument-definition and structuring capabilities with advanced tree, 
simulation (Monte Carlo), stochastic-mesh and calibration methods for both 
single-factor and multi-factor pricing models.

?

NumeriX FX provides valuation and risk management for a wide collection of 
plain and exotic foreign exchange options. NumeriX FX includes a variety of 
Black-Scholes pricing models with a choice of tree- or Monte Carlo-based 
simulation methodologies.

?

NumeriX EQ provides valuation and risk management for a wide collection of 
exotic equity derivatives including barriers, basket options, chooser 
structures and convertible bonds. Please note that NumeriX EQ is in 
development and scheduled for release in Q3 of 2001.

?

NumeriX CR provides valuation and risk management for a wide collection of 
exotic credit derivatives including credit swaps, asset swaps, total return 
swaps, spread options, credit-linked notes and credit basket structures. 
Please note that NumeriX CR is in development and scheduled for release in 
the later half of 2001.

?

NumeriX solutions are?platform independent (Windows NT or Unix) and provided 
in?the form of C and C++ libraries?that are available either as?a modular 
toolkit,?designed to minimize?the development time for?structuring new 
products or models, or?as an application solution. NumeriX application 
solutions are available as an Excel application or as?DLLs designed for quick 
and easy integration with any third-party trading, risk management or 
straight-through processing trade support application.

?

Attached you will find some additional materials describing specific NumeriX 
solutions.

?

I look forward to speaking with you on Monday April 9, 2001 at 1:30 your time 
(2:30 PM NY time).

???

If you have any questions please feel free to give me a call at (212) 
302-6225. 

?

Sincerely,

?

?

Dean Tallam

?
 - NumeriX Tools-Detailed 2001.pdf
 - NumeriX FI 2001.pdf