ERAC Energy Risk Management Principles 2

Question 1

Which risk metric measures the maximum expected loss over a given time horizon at a specified confidence level?

Accepted Answer

Value at Risk (VaR)

Answer

Value at Risk (VaR) quantifies the maximum potential loss over a defined period at a given confidence level (e.g., 95% or 99%).

Question 2

A natural gas utility uses a weather derivative tied to heating degree days. This is an example of managing which type of risk?

Accepted Answer

Volumetric risk

Answer

Volumetric risk arises from uncertainty in demand volumes due to weather; heating degree day derivatives hedge this exposure.

Question 3

In energy trading, 'basis risk' refers to:

Accepted Answer

The difference between the spot price and the futures hedge price at delivery

Answer

Basis risk is the residual price risk that remains when the hedge instrument does not perfectly match the exposure location or specification.

Question 4

Which of the following best describes the 'tolerable risk' threshold in an energy company's risk appetite framework?

Accepted Answer

The maximum risk a company is willing to accept before taking action

Answer

The tolerable risk threshold defines the upper boundary of acceptable risk exposure before mandatory mitigation or escalation is triggered.

Question 5

A power plant operator experiences an unexpected outage during peak demand. Which risk category does this event primarily represent?

Accepted Answer

Operational risk

Answer

Unexpected equipment failures or process disruptions fall under operational risk, which covers losses from internal system failures.

(ERAC) Energy Risk Auditor Certification Practice Test