ERAC Energy Risk Management Principles 5

Question 1

A risk manager notices that electricity price volatility spikes every summer afternoon. This pattern is best described as:

Accepted Answer

Seasonal and intraday volatility clustering in power markets

Answer

Power markets exhibit pronounced volatility clustering tied to seasonal demand cycles and intraday peak load periods, requiring time-varying risk models.

Question 2

Which of the following is an example of reputational risk in the energy sector?

Accepted Answer

A pipeline rupture causing environmental damage that triggers public backlash

Answer

Environmental incidents that attract negative public attention and media coverage directly damage an energy company's reputation, affecting customer trust and regulatory relations.

Question 3

An energy firm sets a 'risk limit' for its trading desk. Breaching this limit should trigger which immediate action according to best practice?

Accepted Answer

Escalation to senior management and review of the position causing the breach

Answer

Risk limit breaches require immediate escalation so that senior management can assess the situation and decide on corrective action transparently.

Question 4

The concept of 'risk aggregation' across an energy portfolio is important because it:

Accepted Answer

Identifies diversification benefits and concentration risks that are not visible at the individual position level

Answer

Aggregating risk across the portfolio reveals correlations, concentration risks, and diversification offsets that cannot be identified by looking at individual positions in isolation.

Question 5

A gas marketing company uses a heat rate call option to manage which specific risk in power generation?

Accepted Answer

The conversion economics between natural gas fuel cost and electricity output value

Answer

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.

(ERAC) Energy Risk Auditor Certification Practice Test

(ERAC) Energy Risk Auditor Certification Practice Test

ERAC Energy Risk Management Principles 5