ERAC Energy Risk Management Principles 4

Question 1

Which scenario would most directly increase the rollover risk of a futures-based energy hedge?

Accepted Answer

A contango market structure where deferred contracts trade at a premium

Answer

In contango, rolling a long futures position forward costs money because each successive contract is priced higher, eroding hedge effectiveness over time.

Question 2

Under CFTC rules, a firm that uses commodity derivatives solely to hedge physical energy price exposure may qualify for:

Accepted Answer

Bona fide hedger status, exempting it from speculative position limits

Answer

Bona fide hedgers using derivatives to offset commercial price risk can receive exemptions from speculative position limits imposed by the CFTC.

Question 3

A risk manager calculates the delta of an energy option portfolio. Delta primarily measures:

Accepted Answer

The sensitivity of the option's price to a one-unit change in the underlying energy price

Answer

Delta measures how much an option's price changes for a $1 move in the underlying commodity price, used to quantity directional price risk.

Question 4

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:

Accepted Answer

Merchant price risk where revenues depend on spot or contracted rates

Answer

Merchant price risk captures the exposure of a generator whose revenue is tied to market prices that can fall below contracted costs or expectations.

Question 5

Which of the following best describes 'model risk' in energy risk management?

Accepted Answer

Potential for losses due to errors or incorrect assumptions in the valuation or risk models used

Answer

Model risk is the risk of adverse outcomes from flawed assumptions, incorrect implementation, or misuse of quantitative models used for pricing or risk measurement.

(ERAC) Energy Risk Auditor Certification Practice Test

(ERAC) Energy Risk Auditor Certification Practice Test

ERAC Energy Risk Management Principles 4