Message-ID: <31028292.1075856593535.JavaMail.evans@thyme>
Date: Fri, 21 Jul 2000 03:54:00 -0700 (PDT)
From: stinson.gibner@enron.com
To: amitava.dhar@enron.com, paulo.issler@enron.com, tanya.tamarchenko@enron.com
Subject: Credit Support Value for MG and PaperCo
Cc: vince.kaminski@enron.com
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Find below a spreadsheet with my very rough calculation of the value of 
credit support for MG and PaperCo.

My approach is as follows:

1.   Assume all contracts can be modelled as financial swaps.
2.   Spread the notional trading volumes over the estimated swap tenors.
3.   Calculate the value of defaulting at each period of the swap (the 
default option)  using Black's formula.
4.   Treat the value of the default options as risky cash flows.  That is 
treat this value just like you would an annuity stream.  By discounting back 
this stream of cash flows at the original risky rate and at the risk-reduced 
rate, I find the value of credit enhancement as the difference in the two 
NPV's.

Please give your comments, especially if this makes no sense to you.

Stinson



