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 scenario would most directly increase the rollover risk of a futures-based energy hedge?
Answer: A contango market structure where deferred contracts trade at a premium
In contango, rolling a long futures position forward costs money because each successive contract is priced higher, eroding hedge effectiveness over time.
Under CFTC rules, a firm that uses commodity derivatives solely to hedge physical energy price exposure may qualify for:
Answer: Bona fide hedger status, exempting it from speculative position limits
Bona fide hedgers using derivatives to offset commercial price risk can receive exemptions from speculative position limits imposed by the CFTC.
A risk manager calculates the delta of an energy option portfolio. Delta primarily measures:
Answer: The sensitivity of the option's price to a one-unit change in the underlying energy price
Delta measures how much an option's price changes for a $1 move in the underlying commodity price, used to quantity directional price risk.
A solar developer is exposed to energy price risk because power purchase agreement (PPA) prices are fixed while merchant prices fluctuate. The best description of this risk is:
Answer: Merchant price risk where revenues depend on spot or contracted rates
Merchant price risk captures the exposure of a generator whose revenue is tied to market prices that can fall below contracted costs or expectations.
Which of the following best describes 'model risk' in energy risk management?
Answer: Potential for losses due to errors or incorrect assumptions in the valuation or risk models used
Model risk is the risk of adverse outcomes from flawed assumptions, incorrect implementation, or misuse of quantitative models used for pricing or risk measurement.
When assessing counterparty credit risk in energy transactions, a Credit Support Annex (CSA) under ISDA documentation primarily functions to:
Answer: Require posting of collateral when mark-to-market exposure exceeds agreed thresholds
A CSA establishes collateral posting obligations, specifying thresholds and eligible collateral types to mitigate counterparty credit exposure.
In energy portfolio management, 'netting' reduces credit risk exposure by:
Answer: Offsetting gains and losses across all trades with the same counterparty to determine net exposure
Netting allows offsetting of positive and negative mark-to-market values across a counterparty's portfolio, reducing the total credit exposure compared to gross settlement.