P+ option valuation model ,
 Mark,

After recently reviewing the booking of the P+ options, it is my=20
understanding that these options are being valued using a standard spread=
=20
option model where the price evolution of the two legs of the spread are=20
assumed to be correlated Geometric Brownian Motion processes  (i.e. the pri=
ce=20
process assumptions are consistent with standard Black-76 model assumptions=
=20
extended to two commodities). =20

The payoff for a call option is:

Payoff =3D Max( 0,  A =01) B =01) K).

Where:
 A =3D NXWTI (delivery price for Nymex)
 B =3D Posting Price =3D (WTI Swap) =01) (Posting Basis)
 K=3D Posting Bonus (fixed).

The only complication of this option as compared to most other spread optio=
ns=20
is that leg "B" of the spread is a combination of three prices,  the two=20
futures prices which make up the WTI swap for the given month, and the=20
average posting basis during the delivery month.   Combination of these=20
prices is easily addressed by simply setting the volatility of leg "B" and=
=20
the correlation to correctly account for the volatility of this basket of=
=20
prices and its correlation with the NXWTI price.  I believe that this=20
approach is more straightforward than the alternative, which would be to us=
e=20
a three or four-commodity model with its associated volatility and=20
correlation matrices.

In summary, I believe that this is an appropriate model for valuation of=20
these types of options, assuming that the inputs are set correctly.

Regards,

Stinson Gibner
V. P. Research
mark.fondren@enron.com