Subject: Work Update

Vasant,  A quick update on a number of on-going projects:  1.
JCC Forward Curve/Hedging Strategy (Enron Japan)  h  An update of the historical P&L model was completed and included both commodity and foreign exchange risks.
The standard deviation of historical simulations for single month swaps was significantly reduced with the foreign exchange hedging strategy (two long yen/$ positions and 1 short yen/$ position).
h  Enron Japan, in cooperation with Enron London, developed an alternative hedging strategy based on Brent $ value.
No P&L historical P&L simulations were conducted for the alternative strategy.
h  The original Brent hedge ratios were based on an average of 3 monthly preliminary JCC values offered by METI.
Presumably, the swap will be settled off of the finalized METI JCC price which is released two months after the fact.
Rousseau forwarded those numbers from 1998 to present this morning.
Unfortunately, our model uses historical JCC values going back to August 1991.
Rousseau will hopefully obtain the required historical JCC time series early next week.
h  I haven't yet heard about Jeff Shankman's response to the memo that was forwarded on Wednesday.
2.
Ethanol Forward Curve (Enron Global Markets)     h  A meeting was held with Marc de la Roche, Darren Maloney, and Sanjay Patel to discuss the development of a forward curve for ethanol.
A first-cut curve based on NYMEX unleaded gasoline, NYMEX WTI crude, and EIA fuel ethanol inventories was constructed and backtested.
Rolling monthly backtesting (using data from 2000 to 2001) suggested that, on average, the modeled and actual ethanol prices were off only by a few cents for time periods up to 6 months (e.g., 6 month swap).
Unfortunately, the 1 SD value for the historical projections was quite large (+/- $0.30 on a $1.40/gal commodity).
h The changing dynamics of the ethanol market offer the greatest challenge to forward curve construction.
That is, ethanol will likely replace MTBE as the fuel oxygenate of choice over time, which will probably signal a stronger relationship with unleaded gas price.
Unfortunately, the current model uses historical data from 1998 to present which do not necessarily reflect such a strong relationship.
These concerns have been noted to the ethanol guys.
h  The ENE ethanol pricing index has been updated with August, September, and October prices and continues to generally track other industry publication values (e.g., Oxy-fuel news).
h  Marc and Darren are in talks with Petrous as a potential counterparty for an ethanol swap.
h  An ethanol status meeting will be held Wednesday or Thursday of next week with Randy Maffett.
3.
Plastics Forward Curves (Enron Global Markets)  h  Mauricio Mora and I have focused on the development of forward curves for a suite of plastics including propylene, ethylene, polypropylene, HDPE, and LLDPE (see earlier email for details).
h  Initial models for each of these plastics have been completed and will be compared to the current model forward curves and Alan Engberg's expected values.
Alan did forward the most recent curves and personal outlooks to us today.
h  Note that the methologies behind the creation of the old forward curves are not known.
Evidently, one can use various rankings (say 1 to 5 depending on market conditions) to manipulate the model forward curve--I don't know whether regression was involved in these forward curve constructions.