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
A risk manager notices that electricity price volatility spikes every summer afternoon. This pattern is best described as:
Answer: Seasonal and intraday volatility clustering in power markets
Power markets exhibit pronounced volatility clustering tied to seasonal demand cycles and intraday peak load periods, requiring time-varying risk models.
Which of the following is an example of reputational risk in the energy sector?
Answer: A pipeline rupture causing environmental damage that triggers public backlash
Environmental incidents that attract negative public attention and media coverage directly damage an energy company's reputation, affecting customer trust and regulatory relations.
An energy firm sets a 'risk limit' for its trading desk. Breaching this limit should trigger which immediate action according to best practice?
Answer: Escalation to senior management and review of the position causing the breach
Risk limit breaches require immediate escalation so that senior management can assess the situation and decide on corrective action transparently.
The concept of 'risk aggregation' across an energy portfolio is important because it:
Answer: Identifies diversification benefits and concentration risks that are not visible at the individual position level
Aggregating risk across the portfolio reveals correlations, concentration risks, and diversification offsets that cannot be identified by looking at individual positions in isolation.
A gas marketing company uses a heat rate call option to manage which specific risk in power generation?
Answer: The conversion economics between natural gas fuel cost and electricity output value
A heat rate call option gives the holder the right to buy gas and sell power at a fixed heat rate, directly hedging the spark spread or gas-to-power conversion margin.
Under the Dodd-Frank Act, which requirement was introduced for most standardized OTC energy derivatives to reduce systemic risk?
Answer: Central clearing through a CFTC-registered derivatives clearing organization (DCO)
Dodd-Frank Title VII mandated central clearing of standardized swaps to reduce bilateral counterparty risk and improve market transparency.
A risk auditor reviewing an energy company's hedging program identifies that hedge ratios have not been updated after a significant change in physical exposure. This finding indicates a failure in:
Answer: Ongoing hedge effectiveness monitoring and rebalancing controls
Hedge ratios must be periodically reviewed and rebalanced to match current physical exposure; failing to do so represents a breakdown in hedge monitoring controls.