John--
I think you're doing the right thing by first getting with Zimin to make sure 
he agrees and will sign off on this change.  Next, before we just change this 
in the model, I will want Greg to run "parallel" valuations to see what the 
impact will be on each person's book.  Then, we will get with the traders and 
see how they want to implement it.  Since the book runners are using the 
correlation to basically make the books have what they believe is a market 
value for capacity, I would assume that they may want to change correlation 
to offset the value change in the volatility; however, that decision will be 
left to each book runner.  

Let me know what you hear back from Zimin.





John Griffith@ENRON
12/12/2000 04:57 PM
To: Colleen Sullivan/HOU/ECT@ECT
cc: Zimin Lu/HOU/ECT@ECT, Greg Couch/HOU/ECT@ECT, Eric Moon/HOU/ECT@ECT, Ed 
McMichael/HOU/ECT@ECT 
Subject: Transport

Hey Colleen, how are thing going?  I haven't talked to you in a while. 

I was trying to tie out a transportation deal in the books with my transport 
model.  I found that the transportation spreadsheet that the books are being 
closed out with was valuing extrinsic value over what my model valued it.  I 
reconciled the differences and the main difference was due to the blending of 
the volatilities.  I brought this problem up back in October of this year.  
Do you remember?   When I talked to Greg Couch today, those changes were not 
made.  I think that it is an issue with all the transportation deals.   

The problem is related to the number of days that is used to weight the 
daily/omicron volatility.  Basically, transportation is a daily spread option 
and if you look at a month like November for instance, you have 30 different 
daily options.  If you were to look at the number of days that the 
daily/omicron volatility should be used you would have the first option with 
1 day of daily vol, the second with 2 days of daily vol, the third with 3 
days of daily vol and so on and so on.  The average number of days that 
should be used to weight the daily/omicron volatility is 15 or the number of 
days in each particular month divided by 2.  The transportation spreadsheet 
is weighting that volatility with the total number of days in the month.  
This usually overstates the extrinsic value since that the daily/omicron 
volatility is usually higher than the monthly volatility.  

Please let me know what you would like me to do.  I have a call into Zimin to 
make sure that my logic is correct.  Thanks. 

John Griffith
x.36247