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 of the following is the primary purpose of stress testing in energy risk management?
Answer: To evaluate portfolio performance under extreme but plausible scenarios
Stress testing assesses how a portfolio or firm would perform under severe market conditions that may fall outside normal VaR models.
In the ALARP (As Low As Reasonably Practicable) principle, a risk is managed to ALARP when:
Answer: The cost of further risk reduction is grossly disproportionate to the benefit gained
ALARP requires reducing risk until the cost of additional mitigation outweighs the safety or financial benefit achieved.
A refiner enters a crack spread swap to lock in the margin between crude oil input costs and refined product revenues. This strategy is best described as:
Answer: A cross-commodity hedge targeting processing margin risk
A crack spread swap hedges the spread between crude and refined product prices, protecting the refiner's processing margin from adverse moves.
Which regulatory body in the US has primary oversight over wholesale electricity market risk and trading practices?
Answer: FERC
The Federal Energy Regulatory Commission (FERC) regulates wholesale electricity markets, transmission, and associated trading activities in the US.
An energy company's risk management policy requires that all commodity positions be marked-to-market daily. This practice primarily supports:
Answer: Transparent and timely recognition of changes in portfolio value
Daily mark-to-market ensures that current market values are reflected in financial statements, enabling timely risk awareness and decision-making.
The 'three lines of defense' model in energy risk governance assigns the primary responsibility for day-to-day risk management to:
Answer: Business units and trading desks (first line)
In the three lines of defense model, the first line (business units) owns and manages risk in daily operations; the second line oversees and challenges; the third line (audit) independently assesses.
Liquidity risk in energy trading most commonly arises from:
Answer: Inability to exit or offset a position without significant market impact
Liquidity risk is the risk of not being able to transact at a fair price due to insufficient market depth, often exacerbated in illiquid energy markets.