Energy Risk Management Principles Flashcards
7 cards from real ERAC practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 7 Energy Risk Management Principles flashcards as text
Which risk metric measures the maximum expected loss over a given time horizon at a specified confidence level?
Answer: Value at Risk (VaR)
Value at Risk (VaR) quantifies the maximum potential loss over a defined period at a given confidence level (e.g., 95% or 99%).
A natural gas utility uses a weather derivative tied to heating degree days. This is an example of managing which type of risk?
Answer: Volumetric risk
Volumetric risk arises from uncertainty in demand volumes due to weather; heating degree day derivatives hedge this exposure.
In energy trading, 'basis risk' refers to:
Answer: The difference between the spot price and the futures hedge price at delivery
Basis risk is the residual price risk that remains when the hedge instrument does not perfectly match the exposure location or specification.
Which of the following best describes the 'tolerable risk' threshold in an energy company's risk appetite framework?
Answer: The maximum risk a company is willing to accept before taking action
The tolerable risk threshold defines the upper boundary of acceptable risk exposure before mandatory mitigation or escalation is triggered.
A power plant operator experiences an unexpected outage during peak demand. Which risk category does this event primarily represent?
Answer: Operational risk
Unexpected equipment failures or process disruptions fall under operational risk, which covers losses from internal system failures.
Expected Shortfall (ES), also called Conditional VaR, is preferred over VaR by some risk managers because it:
Answer: Captures the average loss in the tail beyond the VaR threshold
ES averages all losses exceeding the VaR cutoff, providing a fuller picture of tail risk that VaR alone does not capture.
A risk register in energy risk management primarily serves to:
Answer: Identify, assess, and track risks along with their mitigation status
A risk register is a structured tool that catalogues identified risks, their likelihood, impact, owners, and current mitigation measures.