how Enron works. It's really quite simple. Ismail is a successful
mule trader in Peshawar. Every year Ismail delivers 30 mules to
the Kabul Mule Market and gets $40 per mule.
however, the Khyber Pass is full of warlord militias, so Ismail
is not sure he can drive his mules to market without losing a mule
here and there. Also, the demand for mules in Kabul seems to be
dropping. Maybe he'll only be able to sell 20 mules, or, God forbid,
15, and then be forced to feed and water the rest of them on a money-losing
trek back home. In other words, it's a scary market and Ismail is
worried about feeding his family.
needs is to limit his risk with an Enron derivatives package. First
he pays $2 per mule for a Khyber Pass Derivative, so that any mule
killed or stolen by warlords will be reimbursed at the rate of $20
per mule-half the going market rate, but still better than taking
a total loss. Next he buys Enron Mule Futures. For $28 per contract,
he guarantees delivery of a mule in three months time. He takes
15 of these, figuring that a guaranteed $28 mule sale is better
than showing up in Kabul and discovering that the mule buyers have
been killed by stray bombs.
at the Enron Mule Trading Desk in Houston, eagle-eyed yuppies are
studying the worldwide mule markets and starting to have their doubts
about those $28 delivery contracts. Mule use is dropping all over
Afghanistan, even as the mule count is dwindling. Better resell
eight of those 15 contracts to a European commodities broker for
$24 each, then make up that $32 loss somewhere else while cutting
the company's exposure in half. But how to hedge the risk on the
Aha! A blip
on the computer screen. A temporary mule shortage in southern Iran!
With a current mule price of $42 in Tehran, Enron could offer a
Linked Mule Swap Double Derivative tied to the gap between the price
of mules delivered in Kabul on a given date and the price in Tehran
on the same date. Sure, you would rather have the quick-and-clean
Iran sale, instead of the sale in Kabul that requires trucking the
mules to a foreign market. But even if you add in $4 per mule for
transport through militia-held territory and averaged the markets
together, you can still clear eight bucks just on the gap alone.
price-per-future-mule is now $32.57 when you include the $4-per-mule
loss on the mule futures dumped in Europe. But based on the amazing
$12 Kabul/Tehran trading gap, they can easily put together a "delivery
in either market" contract that will allow them to ask $36
per mule on their Mule Online Internet trading system. The first
mule future sells instantly for $36, and the price bobs up to $36.50.
Two mules go for $36.75, and then there's a big jump for the last
three mules to $37.90. Enron has now off-loaded all its price-based
mule futures liability for a profit of $31.70.
But this doesn't
mean they're out of the mule market in Central Asia. It's still
two months until Ismail delivers his 30 mules, and Enron is on the
hook for his Khyber Pass derivative insurance policy.
not looking good in that part of the world, either. The chances
of a mule being picked off as a road-passage tax are pretty high,
and the loss of the whole herd would be a $600 liability. Quickly,
the financial boys go to work, and part of that liability is resold
to a consortium of Singapore banks, Australian mutual funds, and
Saudi Arabian arms merchant Adnan Kashoggi, thereby reducing Enron's
percentage to 25 percent, or $150 in potential liability against
a $15 premium (remember the $2 per mule paid by Ismail), and Enron
also takes a brokerage fee of $20 from the three other partners,
thereby reducing its real liability to just $120.
still too much of a spread, so Enron continues to hedge. Fortunately,
the company has such a diversified trading floor that Enron mule-market
experts can walk over to the traders in the warlord-militia derivatives
department. Sure enough, at least four tribes near the Khyber Pass
are increasingly concerned about profit margins. There simply aren't
enough people to rob. Things have gotten so bad, in fact, that the
warlords are hedging against the oncoming winter by taking futures
positions in stolen chickens, stolen humanitarian aid trucks, and
Western hostages. There's not a mule market yet, because the warlords
have successfully converted many of the recalcitrant villagers into
pack animals. But Enron knows how to MAKE markets.
numbers-crunchers go to work, and they soon determine that the average
number of stolen mules per 100-man militia is 1.4 per year. That
represents anywhere from $28 to $56 in lost mule-thievery income
if the Khyber Pass is closed or inhospitable to traders from Pakistan.
Amortizing that amount over 12 months, the warlords have an exposure
of anywhere from $2.33 to $4.67 per month in lost pillage. Hence
Enron announces the new Highway Robbery Derivative, in which each
tribe is guaranteed the value of two stolen mules in each 12-month
period in return for paying a premium of $4 per month.
is now complete, and it's a beautiful thing to behold. The chances
of Ismail losing a mule to a raiding party are approximately one
in 30, or 3.33 percent. Since he's paying $60 for his derivative
contract, the expected loss of 3.33 percent of his herd would result
in a payment of only $20 a more than comfortable spread.
Meanwhile, if the mule is stolen by a warlord holding a Highway
Robbery Derivative, then the payment to the other side would only
be $28 against premiums of $48. If Ismail simply passes through
the Khyber Pass without incident and sells all his mules at the
standard price, Enron pockets $60 from Ismail and $48 each from
four warlords, in addition to the previous profit of $31.70 from
that heady Internet mule-futures trading day and the $20 in packaging
commissions. If each warlord steals his standard 1.4 mules per year,
then Enron still owes six-tenths of one mule to the warlord, or
about $22.20 based on a $37 sale price.
profit, based on 5.6 stolen mules, one of which is stolen from Ismail:
$143.20. Total profit from all Ismail-related mule transactions:
$194.90. See, it's simple when you know how it works. Ask Arthur
by United Press International.