re : storage model : simple issues brad , here are my thoughts on your concerns . * you needs curve inputs . this is an it job . i can help you for the curves before the system is properly set up . * intrinsic value vs time value : the intrinsic value depends on how you allocate the volumes . if you have a rough idea about the allocation as you did in the spreadsheet , we can calucate the intrinsic value within the model . the difference between the total and the intrinsic will be the ( option ) time value . however , by pre - allocating volumes , you killed some options . in the storage model , volumes are allocated dynamically , therefore it is hard to distinguish the intrinsic vs . time value . * factor of loading : factor of loadings are used to give historical correlation matrix . the three factors correspond to paralle shift , slopping and curveture . the covariance matrix in the model is expressed in the form covar = row ( vol _ { i } ) * ( correl ( i , j ) ) * colum ( vol _ { j } ) where vols are the implied volatilities from the vol curve . ( correl ( i , j ) ) = l * l ' + residue ( small ) where l is the factor of loading matrix . so in a simple words , the factor of loadings ( say , 60 x 3 ) are a simplier way for us to remember the historical correlation matrix ( say , 60 x 60 ) . let me know if i can offer further help . zimin brad horn 02 / 15 / 2000 07 : 15 am to : zimin lu / hou / ect @ ect cc : sandra henderson / hou / ect @ ect subject : storage model : simple issues zimin : thanks for your time with the revised storage valuation . your right to point out the similarity to market bids . here are some basic questions tied to implementation and calibration : model infrastructure / it support : i obviously need to re - build my link to the forward curves as the model is not working in my new location . short - term ( aprox 1 month ) , i ' d like to establish a link to the ena database egsprod 32 in order to fetch the long - dated price and volatility curves . my link to ena forward curves would then be quickly severed in favor of the curves generated by the new bridgeline entity ( database name and data structure yet to be defined ) . however , its not clear to me what is required in this two stage process to support your model . any definition of model input or minimum support requirements you provide is appreciated . i ' ll then work with sandra henderson , an enron employee providing our it support , to ensure the model continues to work regardless any downstream system changes that may take place as we build and establish our separate trading systems or databases . meanwhile , is there anything you think you can do to ensure im up and running quickly ? sandra : linking excel spreadsheets to bridgeline forward curves will be key to all our pricing projects , not just the storage model supplied by research . intrinsic vs extrinsic value : it would be helpful to decompose the model ' s calculated storage price and to distinguish intrinsic vs extrinsic ( time or option ) value . i could easily link a new spreadsheet tab to your model inputs and to calculate the intrinsic value , and then through a simple difference i could determine the extrinsic value . ive included a simple spreadsheet calculation for the intrinsic value for review . i wanted to share this with you to ask the following : does the nature of the model define intrinsic and extrinsic value differently than the simple difference proposed ? do you think it would make sense to do the simple value decomposition in the backcode c - code via . dll in order to ensure run - time is faster ? my goal here is straightforward : a ) to better understand the model and its sensitivities . ; and b ) to determine if and when the option approach is associating significant value above and beyond the simple present value of the time spreads . factor loadings : what are some of the thoughts or insights you can offer with regards to factor loadings and how i should interpret the graph of the 3 factors calculated ? factor loadings have always been a mystery to me . for example , what problems should i be looking for as a warning against mispricing ? what , if anything , is implied about 1 day price change or expected curve re - shapings ( after all , curve - reshapings are key to storage valuation ! ! ! ) ? calibration : we are preparing a simple summary of descriptive statistics which should allow me to refine some of the model inputs . i ' ll share the data when we are and model results once im up and running .