Rich, Thanks for your response. Sorry for the long e-mail. I did not expect 
to be this long but it kept getting longer and longer while I wrote it. We 
can set up a meeting to discuss about it instead of reading this long e-mail.

You know, any individual product has two risk components---unique risk and 
market risk. Most products in energy industry have very high market risk and 
very low unique risk. (For example, a price of gas produced from Texas is 
highly correlated with the Henry Hub spot price.) Since the market risk plays 
an important role in the energy commodities' prices, people buy and sell 
commodities or their derivatives mainly for "hedging" purpose---to reduce 
their market risk. 

However, the movie market is quite different than other commodity markets. 
The Gross Box Office receipt of "The Little Mermaid" has low correlation with 
the sum of Gross Box Office receipts of all movies releasing at the same 
period. An individual movie has very high unique risk and very low market 
risk. If you remember, the consultant last Friday said that if we own about 
15 movies, their combined total revenue would be pretty much accurately 
forecasted. That means movies' market risk is low and "hedging" is not 
important comparing to "diversification".

Since the unique risk plays an important role in the movie market, I would 
expect that most of our customers would buy and sell for "diversification" 
purpose, not for "hedging" purpose. The producer of some movies would sells 
part of their movies and buy part of the other movies to diversify their 
unique risk. 

I think we are going into the right direction by creating this movie market 
so people who long on a small set of movies can sell part of them and buy 
some parts of other movies. The buyers and sellers in this market can all 
just be the people who naturally long on some slates of movies. They will 
sell some of their own and buy some of others.

I think the idea on grouping a small number of movies to increase liquidity 
is good but we need to make sure that diversification can still be done 
through this market.

If Enron wants to take some position, I would recommend that we must be 
diversified enough (15+ movies as the consultant said). We should avoid 
taking a position on a small number of movies. Otherwise, we will be just an 
"inefficient" gambler. (Like putting all the money into only one or two 
stocks. We could have made the same expected return with a lot less risk by 
investing in S&P500.)

For your questions about the bid-ask pricing system that I proposed in the 
previous e-mail, if there are no buyers, the tentative bid-ask prices would 
be very low. So we tell the seller to reduce their selling price to this 
level if they still want to sell to us. (We can set our bid price to be low 
enough by subtracting its unique risk premium---insurance premium--so now we 
can take this position and behave like an insurance company. But we need to 
have (or expected to have) a significant numbers of similar deals of other 
movies.)

I agree that leaving open orders for several days might be a problem. We can 
set the "bidding period" to be just only 1 day (e.g. every Monday) and 
everything is cleared at the end of the day. 

I have not seen other markets using this dynamic bid-ask pricing system and 
the idea was just came up by myself, so I believe it is new. I plan to write 
a memo explaining the details of this system and send it to you.

Dear everyone, please correct me if I am wrong.
Thanks,
-Chonawee



From: Richard DiMichele@ENRON COMMUNICATIONS on 04/25/2001 01:46 PM
To: Chonawee Supatgiat/Corp/Enron@ENRON
cc: Key Kasravi/Enron Communications@Enron Communications 

Subject: Re: calculating bid-ask prices  

Chonawee:  

Thanks for your input.  This is similar to what I was thinking.  Our prices 
would be "indicative" only.  We could take positions, but initially would try 
to find the other side of any deal we'd do.  That's why we've been spending a 
lot of brain cells trying to come up with an exhaustive list of the "natural" 
buyers and sellers.  To the extent we make the product more generic (e.g., a 
slate of movies as opposed to an individual picture) we may drive out more 
liquidity. 

I'm a little unclear on the settlement.  What if there are no buyers - do we 
tell the sellers they didn't get done?  Also, a buyer or seller would have to 
give us an open order (which might be okay).  However, leaving an order open 
for several days might be a problem.  Are you aware of any other markets 
which trade in the way you suggest?

Rich




	Chonawee Supatgiat@ENRON
	04/24/01 07:40 PM
		 
		 To: Richard DiMichele/Enron Communications@Enron Communications
		 cc: Chonawee Supatgiat/Corp/Enron@ENRON, Cynthia Harkness/Enron 
Communications@Enron Communications, Greg Wolfe/HOU/ECT@ECT, James 
Ginty/Enron Communications@Enron Communications, Jim Fallon/Enron 
Communications@Enron Communications, Kelly Kimberly/Enron 
Communications@Enron Communications, Kevin Howard/Enron Communications@Enron 
Communications, Key Kasravi/Enron Communications@Enron Communications, 
Kristin Albrecht/Enron Communications@Enron Communications, Kristina 
Mordaunt/Enron Communications@Enron Communications, Martin 
Lin/Contractor/Enron Communications@Enron Communications, Paul Racicot/Enron 
Communications@Enron Communications, Zachary McCarroll/Enron 
Communications@Enron Communications, Martin Lin/Contractor/Enron 
Communications@Enron Communications
		 Subject: calculating bid-ask prices


I think we should let the price float with the market instead of trying to 
forecast it. Otherwise, if our forecast is not consistence with the market, 
we may have an imbalance in the bid-ask orders and we may end up taking some 
positions. You know, as Russ and Martin pointed out, we cannot fight with the 
studio and exhibitors because they have inside information and can game the 
price easily.

One way to ensure the balance of the bid-ask orders is to embed an exchange 
system inside our bid-ask prices front end. Each week, we have a trading 
period. During the period, instead of posting bid-ask prices, we post 
"tentative" bid-ask prices, then we ask our customers to submit their 
acceptable buying or selling price. These "tentative" bid-ask prices get 
updated and are shown to the public. Of course, customers can revise/withdraw 
their bids anytime during the trading period. At the end of the period, we 
calculate and post the final bid and ask prices. The seller who submits lower 
selling price than our final bid price gets paid at the bid price. The buyer 
who submits higher buying price than our final ask price pays at the ask 
price. Next week, we repeat the same process.

This way, we can manage our positions easily and we can also behave like a 
broker where we don't take any position at all. We make profit from those 
bid-ask spread. We don't have to worry about forecasting accuracy and 
insiders' trading because we don't have to take any position. Let the market 
be the one who decides the price. 

If we maintain our net position as zero, at the end, when all the actual 
gross box office numbers are reported in those publications, our customers 
with open long/short positions are perfectly matched. Using the 
mark-to-market charge can reduce credit risk.

Thanks,
-Chonawee



---------------------- Forwarded by Chonawee Supatgiat/Corp/Enron on 
04/24/2001 07:24 PM ---------------------------


Chonawee Supatgiat
04/20/2001 04:31 PM
To: Richard DiMichele/Enron Communications@Enron Communications, Key 
Kasravi/Enron Communications@Enron Communications
cc: Martin Lin/Contractor/Enron Communications@Enron Communications 

Subject: some more input

Hi Rich and Key,
Again I think your idea is very good. I think that we, as a market maker, can 
reduce our credit risk (risk of default) if we do the "mark-to-market" 
charging. That is, each week when we release a new expected value of the 
gross box office receipt, we balance all the opening positions the same way 
as in a regular future market. This way, we can give margin calls to the 
couterparties who are expected to owe us a lots of money.
In the last paragraph, I think the gross box office can also be determined 
from the market itself (i.e., if there are lots of buyers, our offer price 
should go up.)
We can offer other derivative products such as options as well.
-Chonawee