ERAC Market Analysis & Financial Reporting 3

Question 1

Which regulatory framework primarily governs financial reporting disclosures for publicly traded US energy companies regarding commodity price risk?

Accepted Answer

SEC Regulation S-K Item 305

Answer

SEC Regulation S-K Item 305 requires quantitative and qualitative disclosures about market risk, including commodity price risk, for public companies.

Question 2

A 'contango' market structure in crude oil futures implies which of the following for a storage operator?

Accepted Answer

Profitable cash-and-carry arbitrage opportunity

Answer

In contango, future prices exceed spot prices, so a storage operator can buy spot, store the commodity, and sell forward at a higher price, creating a cash-and-carry profit if storage costs are covered.

Question 3

When auditing an energy trading desk, which of the following would be MOST concerning regarding value-at-risk (VaR) model reliability?

Accepted Answer

Back-testing shows exceptions far exceed the expected frequency

Answer

Excessive back-testing exceptions indicate the VaR model underestimates actual risk, meaning the model's confidence intervals are not reliable.

Question 4

The 'dark spread' in electricity market analysis measures the profit margin for which type of generating unit?

Accepted Answer

Coal-fired power plant

Answer

The dark spread is the power price minus the cost of coal needed to produce that electricity, representing the gross margin for coal-fired generation.

Question 5

Which accounting method allows energy companies to defer recognition of unrealized gains and losses on qualifying cash flow hedges?

Accepted Answer

Cash flow hedge accounting under ASC 815

Answer

Under cash flow hedge accounting (ASC 815), the effective portion of changes in fair value is recorded in other comprehensive income (OCI) and reclassified to earnings when the hedged transaction affects income.

(ERAC) Energy Risk Auditor Certification Practice Test

(ERAC) Energy Risk Auditor Certification Practice Test

ERAC Market Analysis & Financial Reporting 3