In top of double boiler over low heat or in microwave, melt caramels with water. Remove from heat and stir in pecans and cereal. Drop by heaping teaspoonfuls onto lightly greased waxed paper. Chill until firm. In top of double boiler over low heat, melt chocolate chips and paraffin. Use a double boiler rather than a microwave for this step, as you will need to work over the pot in order to keep the chocolate melted. Dip caramel/pecan/cereal drops in melted chocolate. Place on waxed paper and chill until set. Store in airtight container.