Message-ID: <20196634.1075856356832.JavaMail.evans@thyme>
Date: Fri, 13 Oct 2000 04:59:00 -0700 (PDT)
From: zimin.lu@enron.com
To: brad.horn@enron.com
Subject: Re: Option P&L
Cc: vince.kaminski@enron.com, stinson.gibner@enron.com, robert.shiring@enron.com, 
	jay.knoblauh@enron.com
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Brad,

I was extreamly busy yesterday.  Sorry for answing your question till now.

Although I am not exactly sure how  the system handle gamma, this is what I=
=20
think the system is doing:


Curve shift =3D today's price - yesterady's price

P/L due to curve shift =3D today's market value using today's price curve (=
with=20
everything esle the same as yesterday's) - yesterday's market value using=
=20
yesterday's price curve.

So P/L due to curve shift contains both delta and gamma and higher order=20
terms.
We then use theoretical gamma (meaning option model gamma: 0.5*gamma * (pri=
ce=20
change)2 ) for gamma contribution and?define delta =3D curve shift - theore=
tical gamma.??Therefore, the gamma may not be very accurate to explain the =
delta change, ?especially when you have big price change due to higher orde=
r contribution. ??Let me know your thoughts on this.???Best wishes,??Zimin?=
????????   Brad Horn                10/12/2000 07:11 AM??To: Zimin Lu/HOU/E=
CT@ECT, Stinson Gibner/HOU/ECT@ECT?cc: Vince J Kaminski/HOU/ECT@ECT, Vladim=
ir Gorny/HOU/ECT@ECT, Robert ?Shiring/HOU/ECT@ECT, Jay Knoblauh/HOU/ECT@ECT=
 ?Subject: Option P&L??Gentleman:?        The ERMS system, as you know, has=
 an excellent capability for ?decomposing option P&L into the following com=
ponents:??new deals?curve shift?gamma?vega?theta?rho?drift?2nd order adjust=
ments??What i dont understand is the gamma component which is reported in d=
ollars.  ?The unit of measure suggests that incremental changes in a contra=
ct position ?is being associated with specific prices.  These prices are th=
e effective buy ?or sell prices associated with the dynamic delta position.=
  ??Stated differently, the standard taylor expansion has incorporated a pr=
ice ?variable in such a way as to convert the unit of measure from gamma's =
?standard contract count to total gamma dolalrs.  This is something I dont =
?understand.  To date, inquiries to the risk management accounting group ha=
s ?further revealed that the gamma component of P&L is not well understood.=
  ??This is what concerns me: Bridgeline has 2 books with option exposures =
(NYMEX ?and Gas Daily).  Both books dynamically hedged its positions during=
 ?yesterdays large price move and, through anticipitory hedging in advance =
or ?during the large price move, secured sufficient coverage to neutralize =
?expected changes in delta.  However, our P&L from our underlying position =
did ?not offset our gamma P&L.  Consequently, I have to ask WHY?  Im hoping=
 that a ?brief look at the why gamma dollars are calculated may reveal some=
thing which ?will better guide our hedging decisions.??Any help is apprecia=
ted??