Aim

2014
ERP
Examination
AIM
Statements
2014 Energy Risk Professional (ERP) Examination AIM Statements
2014 Global Association of Risk Professionals. All rights reserved. 1
About the ERP Examination
The Energy Risk Professional (ERP)
Examination is a globally recognized,
practitioner-oriented assessment that
ofers learning objectives from the
physical and nancial energy markets,
along with concepts important to
managing risk across both markets.
Successful candidates are expected
to understand and apply fundamental
concepts, knowledge, and skills linked
to six broad areas of study:
Oil, gas, and coal commodity markets
Global electricity markets, renew-
able generation, and emissions
Financially traded energy products,
structured energy commodity
transactions, market exchanges, and
global regulatory developments
Energy commodity price formation
and market risk
Credit, counterparty, and country
risk assessment and management
Enterprise risk management and
business ethics
2014 ERP Study Guide
The 2014 ERP Study Guide summa-
rizes all core readings necessary to
prepare for the ERP Examination.
Several readings from the 2013 Study
Guide have been deleted and new
readings added to ensure that the
2014 Exam remains both timely and
relevant. A number of readings in
the 2014 ERP curriculum have been
sourced online and cover topics not
found in traditional textbooks. All
online readings are freely available
on the GARP website. All topics and
readings are selected each year
in conjunction with the Energy Over-
sight Committee (EOC), based on a
current assessment of the fundamen-
tal knowledge, skills and abilities
necessary for professionals that man-
age risk in the energy industry. The
ERP Exam Course Pack summarizes all
published readings (online readings are
not included). The ERP Exam Course
Pack is available for purchase in print
format only on the GARP website.
2014 ERP AIM Statements
The Applying Instructional Materials
Statements (AIMs) are an essential
resource for successful exam prepara-
tion. The AIMs summarize the required
learning objectives found in each core
reading outlined in the 2014 Study
Guide, and are linked to the knowl-
edge and skills required for Certied
ERPs. Candidates should be able
to apply the AIMs summarized for
each reading.
Hints on Exam Preparation
ERP Exam questions are derived
directly from the learning objectives
summarized in the AIMs. Candidates
are strongly encouraged to review
the AIMs in conjunction with the
2014 Study Guide and ERP Exam
Preparation Handbook when prepar-
ing for the ERP Examination.
Test Weights and Question Allocation
Exam weights and question allocations for the 2014 ERP Examination have
been structured to create an examination that balances intellectual rigor
against exam validity and reliability, two important characteristics of any
professional certication exam.
Physical Energy Commodities and Markets
Oil, Gas and Coal Markets 25% 35 questions
Electricity Markets and Renewable Generation 25% 35 questions
Section Total 50% 70 questions
Financial Products and Risk Management
Financially Traded Energy Products and 15% 21 questions
Structured Transactions
Energy Commodity Price Formation and
Market Risk 15% 21 questions
Credit, Counterparty, and Country Risk
Assessment 15% 21 questions
Enterprise Risk Management and Business Ethics 5% 7 questions
Section Total 50% 70 questions
Exam Total 100% 140 questions
2014 ERP AIM Statements
Table of Contents
Oil, Gas and Coal Markets .......................................................................................................3
Electricity Markets and Renewable Generation .............................................................11
Financially Traded Energy Products and Structured Transactions.......................22
Energy Commodity Price Formation, and Market Risk.............................................28
Credit, Counterparty, and Country Risk Assessment ................................................34
Enterprise Risk Management and Business Ethics.....................................................40
PHYSICAL ENERGY COMMODITIES AND MARKETS
OIL, GAS AND COAL MARKETSExam Weight | 25%
Reserve estimation and reporting
Grades of crude oil and natural gas classications
Proved, possible and probable reserves
Barrel of Oil Equivalent
Unconventional resources
Mineral rights ownership
Ofset clause, royalty payments, and other lease provisions
Fiscal systems applied in global production
Concessionary
Contractual
Production sharing agreements
Project development and valuation
Real options
Global crude oil benchmarks and price formation
Brent
WTI
Dubai-Oman
Petroleum transportation and storage
Pipeline and seaborne economics
Crude oil rening processes, products and economics
Renery complexity
Marginal crude oils
Crack spread
Renewable Identication Numbers (RINs)
Global natural gas markets and price formation
Hub pricing
Oil indexation
Natural gas transportation and storage
Pipeline processes and economics
Storage technologies and economics
Global coal markets and price formation
Physical properties
Global benchmarks and trading
4 2014 Global Association of Risk Professionals. All rights reserved.
Readings for Oil, Gas and Coal Markets35 Questions
Reserves and Mineral Rights
1. Joseph Hilyard. The Oil and Gas Industry: A Non-Technical Guide. (Tulsa, OK: PennWell, 2012).
Chapter 2...........................Oil Overview
2. Vivek Chandra. Fundamentals of Natural Gas: An International Perspective.
(Tulsa, OK: PennWell Books, 2006).
Chapter 1 ............................The Basics
(Gas Chemistry and Language, Units of Natural Gas, and Gas Formation Sections only)
3. Charlotte Wright and Rebecca Gallun. Fundamentals of Oil & Gas Accounting, 5th Edition.
(Tulsa, OK: PennWell, 2008).
Chapter 1 ............................Upstream Oil and Gas Operations
Chapter 15..........................Accounting for International Petroleum Operations
4. Andrew Inkpen and Michael H. Mofett. The Global Oil and Gas Industry: Management, Strategy and Finance
Chapter 4...........................Developing Oil and Gas Projects
AIMS:
Joseph Hilyard. The Oil and Gas Industry: A Non-Technical Guide.
Chapter 2 ..............................Oil Overview
Candidates, after completing this reading, should be able to:
Describe each major class of benchmark crude oil.
Understand how reserves difer from resources and how that diference afects project economics.
Dene an unconventional resource and understand the two most common types (tar sands and shale oil)
including the characteristics that make them diferent from conventional hydrocarbons.
Describe the diference between proved, probable and possible reserves and apply the terms 1P, 2P and 3P.
Summarize the diferent units of measure for crude oil and natural gas.
Dene the term Barrel of Oil Equivalent (BOE) and understand its application.
Vivek Chandra. Fundamentals of Natural Gas: An International Perspective.
Chapter 1 ...............................The Basics
(Gas Chemistry and Language, Units of Natural Gas, and Gas Formation Sections only)
Describe the relationship between liqueed petroleum gas, natural gas liquids and condensates.
Dene wet, dry, sweet, sour and associated natural gas.
Identify the common units of measure for natural gas.
Charlotte Wright and Rebecca Gallun. Fundamentals of Oil & Gas Accounting, 5th Edition.
Chapter 1 ...............................Upstream Oil and Gas Operations
Describe mineral rights and interests, particularly hydrocarbon ownership regimes.
Diferentiate between the acquisition and leasing of exploration and production rights.
Apply the ofset clause, royalty payments and other lease provisions used in exploration and production.
Chapter 15.............................Accounting for International Petroleum Operations
Identify and apply the various scal systems used in global petroleum contracts including: concessionary
systems, contractual systems, production sharing or service contracts.
Calculate the gross revenue payouts owed to each party in a concessionary system.
Calculate the royalty payout under a production sharing or service contract.
Dene prot oil and explain its application.
Describe how a joint operating agreement works and understand the circumstances when it is used.
Understand the primary accounting regulations that afect petroleum contracts.
Andrew Inkpen and Michael H. Mofett. The Global Oil and Gas Industry: Management, Strategy and Finance.
Chapter 4..............................Developing Oil and Gas Projects
Understand the concept of unitization and its relationship to the development of Joint Development Zones.
Assess a projects nancial viability using Net Present Value (NPV) and Internal Rate of Return (IRR).
Identify pre-completion, post completion and macroeconomic risks in project development.
Describe the role of contractors used by E&P rms in project development.
Identify the major challenges that can arise during project development and assess their potential impact.
Project Development and Real Options
5. Betty J. Simkins and Russell E. Simkins, eds. Energy Finance and Economics: Analysis and Valuation,
Risk Management, and the Future of Energy. (Hoboken, New Jersey: Wiley, 2013).
Chapter 11...........................Real Options and Applications in the Energy Industry
6. William Bailey, Benoit Couet, Ashish Bhandari, Soussan Faiz, Sunaram Srinivasan and Helen Weeds.
Unlocking the Value of Real Options. (Oileld Review, 2004).
Freely available on the GARP Website.
AIMS:
Betty J. Simkins and Russell E. Simkins, eds. Energy Finance and Economics: Analysis and Valuation,
Risk Management, and the Future of Energy. (Hoboken, New Jersey: Wiley, 2013).
Chapter 11..............................Real Options and Applications in the Energy Industry
Understand the similarities and diferences between the exercise of real options and nancial options.
Know the characteristics of the diferent types of real options (option to expand, option to exercise, etc.)
and the circumstances when they are employed.
Describe how Black-Scholes, binomial trees, and Monte Carlo simulations can be applied in a real option
valuation; identify the challenges associated with each approach.
William Bailey, Benoit Couet, Ashish Bhandari, Soussan Faiz, Sunaram Srinivasan and Helen Weeds.
Unlocking the Value of Real Options. (Oileld Review, 2004).
Understand and apply a net present value (NPV) calculation to make investment decisions in a gas/oil eld.
Explain how a binomial lattice is used in the valuation of an asset or option and be able to calculate the
value of an up or down move.
Describe the use of real options in circumstances such as switching or salvage decisions with an existing
oil or gas project.
Crude Oil Benchmarks, Global Pricing and Market Transactions
7. Bassam Fattouh. An Anatomy of the Crude Oil Pricing System. (The Oxford Institute for Energy Studies).
(Sections 3 to 9 only)
AIMS:
Bassam Fattouh. An Anatomy of the Crude Oil Pricing System (The Oxford Institute for Energy Studies).
Summarize the process used to determine price diferentials and identify factors that inuence the price
diferential including the equivalence to the buyer principle.
Describe the role of price reporting agencies (PRAs) in price identication; summarize the methodologies
used by PRAs to assess commodity prices and identify criticisms of PRA price assessment.
Understand the mechanics and specications of the 21-day BFOE (Forward Brent), the Brent Futures, the
Exchange for Physical (EFP) and the Dated Brent/BFOE contracts.
Dene Contracts for Diferences (CFDs) and understand their application when hedging basis risk associated
with Forward Brent contracts or deriving forward prices from a combination of Dated Brent prices and CFDs.
Understand the relationship between futures contracts and physical supply.
Compare and contrast the Brent, WTI, and Dubai-Oman crude oil benchmarks in terms of liquidity, price
transparency, and available nancial products.
Summarize the mechanics of WTI futures contracts including related delivery requirements, and compare
WTI Posting-Plus (P-Plus) pricing to NYMEX CMA pricing.
Understand the logistical challenges that can impact the efectiveness of WTI as a global crude oil benchmark.
Explain how the Dubai benchmark price can be calculated using swaps.
Crude Oil Transportation and Storage
8. Andrew Inkpen and Michael H. Mofett. The Global Oil and Gas Industry: Management, Strategy and Finance.
Chapter 11...........................Transportation
AIMS:
Chapter 11..............................Transportation
Identify the technical issues and economic considerations associated with building a new pipeline, including:
stakeholders, safety issues, routing decisions and storage options.
Understand how diferent rened products are separated in a pipeline and describe batch cutting, over wash
and transmix.
Identify demand-driven, supply-driven, and market-driven scenarios and know how they impact pipeline
development decisions.
Using the BTC case as an example, identify political, economic and logistical challenges to the construction
of pipelines.
Describe the diferent classications and volume range of oil tankers.
Understand the Worldscale pricing system and calculate transportation costs for a shipment of oil.
Petroleum Rening
Chapter 12..........................Rening
10. William L. Lefer. Petroleum Rening in Nontechnical Language, 3rd Edition.
Chapter 20........................Simple and Complex Reneries
11. Brent Yacobucci. Analysis of Renewable Identication Numbers (RINs) in the Renewable Fuel Standard.
(Congressional Research Service, July 2013).
AIMS:
Chapter 12.............................Rening
Understand how operations difer between an IOC and independent rener.
Describe the relationship between a renery's complexity, its choice of crude oil inputs, and its optimal product mix.
Assess the economics of renery operations including the relationship between the cost of crude oil and
renery margins and the impact of a renery's complexity on its product mix and prot margin.
Summarize the products produced and the impurities removed during the crude oil rening process.
Identify common crack spreads like the 3:2:1 and the 6:2:3:1 NWE spreads, and calculate a crack spread given
input and output prices.
William L. Lefer. Petroleum Rening in Nontechnical Language, 3rd Edition.
Identify the factors that determine renery complexity.
Explain the role rening margin plays in setting a price.
Describe how crude oil prices are established; including how complex reneries can increase their margin
by rening heavy crude oil.
Brent Yacobucci. Analysis of Renewable Identication Numbers (RINs) in the Renewable Fuel Standard.
(Congressional Research Service, July 2013).
Describe Renewable Identication Numbers (RINs) and explain how RINs are produced and traded.
Summarize the mechanics of the Renewable Fuels Standard (RFS) and describe the classes and categories
of RINs which can be used to meet biofuel requirements as part of the RFS.
Describe factors which can impact the market prices of RINs.
The Global Natural Gas Market
12. International Gas Union. Wholesale Gas Price FormationA Global View of Price Drivers and Regional Trends.
(Sections 1 to 5 and 8 to 10 only)
AIMS:
International Gas Union. Wholesale Gas Price FormationA Global View of Price Drivers and Regional Trends.
(Sections 1 to 5 and 8 to 10 only)
Understand and apply the following natural gas pricing terms: wellhead price, border/beach price, hub price,
citygate price, end user price and netback price.
Describe potential short, medium and long-term supply-side and demand-side drivers for natural gas prices.
Summarize the eight key mechanisms for pricing gas and identify the geographic regions where each
mechanism is most prevalent.
Describe the relationship between a local gas pricing mechanism, the observed market price and the
hypothetical market-clearing price.
Identify the factors that inuence the volatility of natural gas prices, including oil-linked prices.
Assess the relationship between price volatility and natural gas supply across various hypothetical price levels.
Natural Gas Contracts, Transportation, LNG, and Storage
13. Vincent Kaminski. Energy Markets. (London: Risk Books, 2012).
Chapter 10.........................Natural Gas Transportation and Storage
Chapter 9...........................Liqueed Natural Gas
15. Vivek Chandra. Fundamentals of Natural Gas: An International Perspective.
Chapter 2...........................Transport and Storage (Gas Storage Section only)
Chapter 4.............................Contracts and Project Development (Gas Sales and Transportation Contracts Sections only)
AIMS:
Vincent Kaminski. Energy Markets. (London: Risk Books, 2012).
Chapter 10 ............................Natural Gas Transportation and Storage
Describe the US pipeline system and explain how capacity can be increased in a pipeline system.
Describe and compare diferent types of pipeline transportation contracts.
Understand the range of xed and variable cost components associated with natural gas pipeline transportation
charges, including tarifs; calculate the cost of a natural gas pipeline shipment.
Explain the steps in the nomination process, including balancing mechanisms.
Explain how natural gas transportation rates are regulated in the US.
Understand the economic decisions that drive the transportation of natural gas through pipelines
Describe LNG transportation and production technology trends and identify factors which impact the cost
structure of the LNG supply chain.
Explain how natural gas storage inventories are reported and describe how weekly natural gas inventory data
can be forecasted, including drawbacks to this approach.
Explain features of natural gas storage contracts and explain how storage rates are regulated in the US.
Chapter 9..............................Liqueed Natural Gas
Identify regional trends in the global LNG trade.
Summarize the business and nancial arrangements used in LNG production and transportation.
Understand the operation of an LNG train and describe the liquefaction process.
Compare and contrast three types of shipping contracts: Free On Board (FOB), Cargo, Insurance and Freight
(CIF) and Delivered Ex Ship (DES).
Understand the challenges associated with the development of the Gorgon LNG project.
Vivek Chandra. Fundamentals of Natural Gas: An International Perspective.
Chapter 2 ..............................Transport and Storage (Gas Storage Section only)
Summarize the reasons why natural gas is stored.
Compare and contrast the common structures used for storing natural gas.
Chapter 4.................................Contracts and Project Development (Gas Sales and Transportation Contracts Sections only)
Understand the mechanics and terms of a gas sales agreement (GSA) including take-or-pay obligations,
nominations and force majeure.
Compare the terms of the sale and purchase of LNG versus natural gas.
Understand why some regions index LNG prices to crude oil (i.e. the JCC price in Japan); calculate an LNG
price using a crude oil index.
Global Coal Markets
16. Vincent Kaminski. Energy Markets.
Chapter 26 ........................Coal Markets
17. Richard Morse and Gang He, The World's Greatest Coal Arbitrage: China's Coal Import Behavior and
Implications for the Global Coal Market. (PESD Stanford, August 2010).
AIMS:
Vincent Kaminski. Energy Markets.
Chapter 26............................Coal Markets
Explain the physical and chemical properties important to coal analysis, and compare the physical properties
of anthracite, bituminous, sub-bituminous and lignite coal.
Identify and apply indices frequently used as coal price benchmarks.
Explain how coal is traded and describe features of popular coal contracts, including exchange-traded and
OTC contracts.
Understand, compare, and contrast the economics of coal-red and natural-gas red power plants.
Richard Morse and Gang He, The Worlds Greatest Coal Arbitrage: China's Coal Import Behavior and
Implications for the Global Coal Market. (PESD Stanford, August 2010).
Understand the basic economics of the Chinese coal market; compare domestic reserves to domestic demand.
Explain the arbitrage opportunities available to coal buyers in southern China.
Describe the role of freight costs in setting coal market prices.
Explain how Chinese arbitrage has impacted prices on the global coal market.
ELECTRICITY MARKETS AND RENEWABLE GENERATIONExam Weight | 25%
Economics of power generation and dispatch
Baseload, mid-merit, and peak generation
Consumer demandValue of Lost Load (VOLL)
System reliability
Ancillary services
Operating reserves
Demand response
Market design
Day-Ahead and Real-Time markets
ISOs, RTOs and power pools
Power transmission
Mechanics
Congestion, losses, and pricing
Analytical tools
Heat rate
Spark spreads
Generation stack
Investing in generation capacity
Capacity markets
Structured solutions for electricity markets
Capacity payments
Auction Revenue Rights (ARRs)
Financial Transmission Rights (FTRs)
Tolling agreements
Global market applications and current trends
Renewable generation
Technologies
Economics
Carbon emissions
Cap and trade programs (EU ETS)
Project nance fundamentals
Readings for Electricity Markets and Renewable Generation35 Questions
Power Market Economics
1. Daniel Kirschen and Goran Strbac. Fundamentals of Power System Economics.
(West Sussex, England: John Wiley & Sons, 2004).
Chapter 3...........................Markets for Electrical Energy
Chapter 4...........................Participating in Markets for Electrical Energy (Sections 4 to 4.3.1.14 only)
AIMS:
Daniel Kirschen and Goran Strbac. Fundamentals of Power System Economics.
(West Sussex, England: John Wiley & Sons, 2004).
Chapter 3 ..............................Markets for Electrical Energy
Understand the role of the spot (real time) market in the reliable operation of an electric grid.
Describe the types of bilateral trades conducted in the electricity market and the challenges in price reporting.
Understand the strategy behind placing or accepting bids and ofers on an open electricity market.
Explain the role of the system marginal price (SMP) in an electricity pool.
Construct a stack of bids and ofers to meet a given level of demand on a grid.
Calculate the settlement of electricity contracts, including instances when imbalances exist.
Chapter 4..............................Participating in Markets for Electrical Energy (Sections 4 to 4.3.1.14 only)
Understand the methods used to determine the amount a customer is willing to pay for electricity, including
value of lost load (VOLL).
Describe the economic factors considered by a power retailer, and understand demand forecasting.
Understand the relationship between the marginal cost of generation and market prices.
Calculate the protability of a generating unit when given a set of market parameters.
Explain how start-up costs, dynamic, and environmental constraints afect the operating decisions of a
power plant.
System Reliability and Demand Response
Chapter 5...........................System Security and Ancillary Services (Sections 55.4.3.1 only)
3. Steven Stoft. Power System Economics: Designing Markets for Electricity. (Piscataway, NJ: IEEE Press, 2002).
Chapter 2-3.......................Reliability and Generation
Chapter 2-5.......................Value-of-Lost-Load Pricing
Chapter 2-6.......................Operating-Reserve Pricing
Chapter 3-4.......................Ancillary Services
4. Bo Shen, Girish Ghatikhar, Chun Chun Ni, and Junqiao Dudley. Addressing Energy Demand Through Demand
Response. (Berkeley National Laboratory, June 2012). (Sections 1 to 4 only)
AIMS:
Chapter 5 ..............................System Security and Ancillary Services (Sections 55.4.3.1 only)
Dene and provide examples of ancillary services and the economics of each.
Identify the factors inherent in the electricity market that result in the need for ancillary services.
Dene the term: black start capability.
Steven Stoft. Power System Economics: Designing Markets for Electricity. (Piscataway, NJ: IEEE Press, 2002).
Chapter 2-3...........................Reliability and Generation
Compare and contrast adequacy and security in an electric power system.
Dene operating reserves, lost load, and augmented load.
Calculate the level of lost load and operating reserves.
Chapter 2-5 ..........................Value-of-Lost-Load Pricing
Describe the value of lost load (VOLL) and marginal VOLL.
Explain VOLL pricing and describe the advantages and risks of a VOLL pricing system.
Understand the relationship between VOLL pricing, power market efciency, and installed capacity.
Chapter 2-6 ..........................Operating-Reserve Pricing
Compare and contrast operating reserve pricing and VOLL pricing.
Describe the risks and market power faced by system operators under operating reserve pricing.
Chapter 3-4..........................Ancillary Services
Describe six ancillary services in a power system and understand the role of various market participants in
providing each service.
Describe balancing and frequency stability, and explain the role of supplemental reserves.
Bo Shen, Girish Ghatikhar, Chun Chun Ni, and Junqiao Dudley. Addressing Energy Demand Through Demand
Response. (Berkeley National Laboratory, June 2012). (Sections 1 to 4 only)
Dene demand response (DR) and understand how DR works to curtail shortages on a power grid.
Understand how government policy and market deregulation have been instrumental in the creation of
DR programs.
Compare and contrast the DR programs for various RTOs.
Understand how bilateral DR programs like cost recovery and demand-side management (DSM) operate.
Describe the various methods used to encourage end-user participation in DR programs.
Market Design
5. Steven Stoft. Power System Economics: Designing Markets for Electricity.
Chapter 3-1 ........................Introduction
Chapter 3-2.......................The Two-Settlement System
Chapter 3-3.......................Day-Ahead Market Designs
Chapter 3-6.......................The Real-Time Market in Theory
AIMS:
Steven Stoft. Power System Economics: Designing Markets for Electricity.
Chapter 3-1 ...........................Introduction
Understand the various designs for an electric market and their key diferences.
Calculate the cost of transmission between two points on a power grid.
Chapter 3-2...........................The Two-Settlement System
Calculate the cashow for a transaction in a two-settlement system.
Understand Contracts for Diferences (CFD) and calculate the settlement of a CFD.
Understand the impact of locational price diferences on the settlement of a bilateral trade.
Explain ex-post pricing and understand how it afects transaction settlement.
Chapter 3-3...........................Day-Ahead Market Designs
Calculate a consumer or producer surplus when given a set of auction data.
Understand the role of marginal costs in setting prices though an auction process.
Compare and contrast four types of day-ahead markets.
Chapter 3-6 ..........................The Real-Time Market in Theory
Compare and contrast real-time market transactions and day-ahead transactions and understand their
fundamental diferences.
Understand how side payments can be used by RTOs (like PJM) to promote efcient market operation.
Describe the conditions under which generators in a market are required to deviate from volumes of power
specied in a submitted contract.
Understand the relationship between real-time pricing and the balancing market.
Power Transmission, Losses, and Congestion Pricing
6. Steven Stoft. Power System Economics: Designing Markets for Electricity.
Chapter 5.1.........................Power Transmission and Losses
Chapter 5.2........................Physical Transmission Limits
Chapter 5.3........................Congestion Pricing Fundamentals
Chapter 5.4.......................Congestion Pricing Methods
Chapter 5.9 .......................Transmission Rights
AIMS:
Steven Stoft. Power System Economics: Designing Markets for Electricity.
Chapter 5.1 ............................Power Transmission and Losses
Dene the terms: volts, watts, amperes, ohms.
Understand the power law and Ohms law and how they afect the operation of energy markets.
Understand the basic operation of an AC power network, including the use of transformers within the network.
Chapter 5.2...........................Physical Transmission Limits
Dene reactive power and understand its application within a power grid.
Understand the common terminology associated with DC and AC power systems.
Chapter 5.3...........................Congestion Pricing Fundamentals
Explain the impact of congestion on price discovery in an electricity market.
Understand pricing of a transmission right (TR).
Describe competitive locational prices (CLPs) and how CLPs help to minimize electricity generation costs.
Chapter 5.4...........................Congestion Pricing Method
Understand the central computation of CLPs and why it is similar to price discovery by bilateral traders.
Describe how constraint can afect the ow of power through a simple three bus system.
Understand the efect that constraint has on electricity prices and calculate the price of electricity in an
interconnected system both in unconstrained and constrained conditions.
Calculate a simple congestion rent payment.
Chapter 5.9...........................Transmission Rights
Understand the market impact of transmission rights, including hedging physical exposures in the power markets.
Calculate the valuation of a transmission congestion contract (TCC).
Compare and contrast the types of TCCs employed in markets like CAISO, ERCOT or PJM.
Dene counterows and understand their relevance in real-world power distribution.
Explain the relationship between TCCs and congestion rent.
Understand the purpose and application of physical transmission rights.
Analytical Tools and Structured Solutions for Electricity Markets
Chapter 22.........................Analytical Tools
Chapter 23.........................Electricity Market Transactions
AIMS:
Chapter 22............................Analytical Tools
Compare and calculate the capacity factor, availability factor, load factor, and demand factor.
Describe, compare and calculate thermal efciency and the heat rate, and explain the relationship between
the heat rate and the marginal cost of electricity.
Calculate the spark spread, including clean and dark spreads, and understand how they are applied.
Explain challenges associated with modeling the spark spread.
Describe the supply stack (generation stack) and understand its limitations.
Identify sources of published data for electricity generation and emissions estimation.
Explain how data about the electricity forward curve, cash market transactions, power/fuel price spreads,
and power outages is collected and reported by price reporting agencies.
Chapter 23............................Electricity Market Transactions
Dene, describe, and provide examples of ancillary services.
Explain the mechanics of providing reactive power and voltage support.
Explain the rationale and criticisms of capacity payments.
Describe key challenges and considerations in the implementation of a capacity payments system.
Describe Financial Transmission Rights (FTRs) and calculate the payout of an FTR.
Describe auction revenue rights (ARRs), describe the FTR auctioning system, and compare ARRs to FTRs.
Describe drawbacks to the use of FTRs and understand how credit risk can arise through the use of FTRs.
Explain the mechanics of power pool transactions in the US, including frequently used block types and
time buckets.
Describe features of full requirements contracts entered into by power marketers and explain the risks
associated with these contracts.
Explain the mechanics and settlement of a tolling transaction.
Investing in Generation Capacity
Chapter 7...........................Investing in Generation
AIMS:
Chapter 7 ..............................Investing in Generation
Assess the economic viability of a power plant using factors including the internal rate of return (IRR) and
minimum acceptable rate of return (MARR).
Understand how power plant characteristics impact the calculation of IRR.
Understand how a plants utilization factor will afect the IRR, particularly for renewable power installations.
Understand load-duration curves and their application in an investment in new power generation capacity.
Understand the marginal generators role in setting electricity prices.
Calculate an auction bid for a peaker plant.
Understand the factors that create a three-stage piecewise linear price curve for the electricity market.
Understand a capacity element (CE) calculation and explain how CE proposes to incentivize the construction
of additional generation capacity.
Global Electricity Market Applications and Current Trends
9. Johannes P. Pfeifenberger and Kathleen Spees. Evaluation of Market Fundamentals and Challenges to
Long-Term System Adequacy in Alberta's Electricity Market. The Brattle Group, April 2011.
(Sections I, II and III only)
10. Australian Energy Market Operator. An Introduction to Australias National Electricity Market.
11. Nord Pool Spot. The Nordic Electricity Exchange and Model for a Liberalized Electricity Market.
12. Hogan, Lovells, Lee & Lee. Singapore Energy Market (Schedule 1: Summary of Singapore Electricity Market
Deregulation and Wholesale Market Operations).
13. P. E. Baker, Prof. C. Mitchell and Dr. B Woodman. Electricity Market Design for a Low-carbon Future.
AIMS:
Johannes P. Pfeifenberger and Kathleen Spees. Evaluation of Market Fundamentals and Challenges to
Long-Term System Adequacy in Alberta's Electricity Market. The Brattle Group, April 2011.
(Sections I, II and III only)
Understand the potential impact that regulatory changes, renewable generation, and fuel-on-fuel competition
may have on the electricity market in Alberta.
Identify available features of electricity market design that address resource adequacy.
Understand how price spikes can impact energy-only power markets like Alberta.
Summarize operational decisions associated with the expiration of Power Purchase Agreements (PPAs) and
understand the impact that expiring PPAs have had on generating capacity in the Alberta electricity market.
Explain the efect that greenhouse gas (GHG) reduction legislation will have on the power market in Alberta
and the methods currently employed to meet GHG target levels.
Describe the challenges associated with integrating wind generation into the power grid, including the
challenges of long-term resource adequacy and the impact wind power can have on price curves.
Australian Energy Market Operator. An Introduction to Australias National Electricity Market.
Understand the roles of AEMO and NEM in the Australian market.
Identify the Market Price Cap and Market Floor Price and understand their use in electricity transactions.
Describe the scheduling of generators for a given hour under NEM rules and calculate the market price.
Understand the diference between regulated and unregulated interconnectors and the auction of inter-
region settlement residues.
Describe how power forecasts afect market operation.
Explain the use of hedge contracts and how these transactions are settled.
Nord Pool Spot. The Nordic Electricity Exchange and Model for a Liberalized Electricity Market.
Identify the stakeholders in a liberalized electricity market.
Describe the role and duties of the Transmission System Operator (TSO) in a deregulated market.
Summarize the process a TSO uses to manage supply and demand on the electric grid.
Calculate the settlement (payment) for a quantity of dispatched/consumed power under NORD Pool rules.
Understand how NORD Pool up-regulation and down-regulation pricing ensures efcient market operation.
Hogan, Lovells, Lee & Lee. Singapore Energy Market (Schedule 1: Summary of Singapore Electricity Market
Deregulation and Wholesale Market Operations).
Understand Singapores creation of articial LNG prices and the rationale for this policy.
Describe the deregulation of Singapores electricity market
Describe the nancial ows and contract settlement in both the wholesale and retail markets.
Understand the types of ofers made by a generator, how these ofers are accepted, market prices established
and ofers cleared by the market.
Describe vesting contracts, their use and their settlement process.
P. E. Baker, Prof. C. Mitchell and Dr. B. Woodman. Electricity Market Design for a Low-carbon Future.
Explain the impact of wind power on electricity price cost curves, including the impact of negative prices.
Explain how investments in renewable power generation will be incentivized under the new market design,
including capacity-based mechanisms.
Dene the balancing market and understand the relationship between wind power production and balancing
costs, and explain how balancing costs are reduced.
Dene feed-in tarifs and understand their use and the efect on the market.
Discuss the need to provide market pricing signals to address grid congestion.
Global Renewable Generation, Carbon Emissions and Project Finance
14. Nuclear Energy Agency. Nuclear Energy Today, Second Edition (2012). (Sections 2, 4, 6 and 8 only)
15. Intergovernmental Panel on Climate Change (IPCC). IPCC Special Report on Renewable Energy Sources and
Climate Change Mitigation.
Chapter 3...........................Direct Solar Energy (Sections 3.33.5 only)
Chapter 5...........................Hydropower (Sections 5.35.5 only)
Chapter 7...........................Wind Energy (Sections 7.37.5 and 7.8 only)
16. Larry Parker (U.S. Congressional Research). Climate Change and the EU-Emissions Trading Scheme (ETS):
Looking to 2020.
17. Chris Groobey, John Pierce, Michael Faber and Greg Broome. Project Finance Primer for Renewable Energy
and Clean Tech Projects.
AIMS:
Nuclear Energy Agency. Nuclear Energy Today, Second Edition (2012). (Sections 2, 4, 6 and 8 only)
Compare and contrast diferent nuclear reactor technologies, including pressurized water reactors, boiling
water reactors, pressurized heavy water reactors, fast breeder reactors, Generation IV reactors, small modular
reactors (SMRs), and fusion reactors.
Identify the safety risks associated with nuclear power generation, and describe the methodologies and features
used to assess and mitigate these risks.
Understand the causes, impact, and safety implications of the Three Mile Island, Chernobyl, and Fukushima
Daiichi incidents.
Compare low-level, intermediate-level, and high-level radioactive waste and identify common methodologies
for storage, transport, and disposal of each type of waste.
Understand the economics of nuclear power generation and compare the economics to other types of
electricity generation.
Intergovernmental Panel on Climate Change (IPCC). IPCC Special Report on Renewable Energy Sources and
Climate Change Mitigation.
Chapter 3 ..............................Direct Solar Energy (Sections 3.33.5 only)
Compare and contrast various solar generation technologies, including photovoltaic (PV) and concentrating
solar power (CSP).
Understand how PV systems are integrated into the power grid.
Understand technologies used to transport and store solar generated electricity.
Explain the smoothing efect with respect to multiple PV solar systems.
Chapter 5 ..............................Hydropower (Sections 5.35.5 only)
Compare and contrast run-of-river, storage hydropower, and pumped storage technologies.
Understand factors that impact the efciency of a hydropower plant, and compare the efciency of
hydropower turbines over a range of discharge levels.
Describe the characteristics of hydropower generation and understand how these characteristics can
contribute to the reliable operation of a power grid.
Chapter 7 ..............................Wind Energy (Sections 7.37.5 and 7.8 only)
Understand the dynamics of the power curve for a wind turbine.
Compare and contrast the generation technology and output associated with onshore and ofshore wind facilities.
Understand the challenges associated with planning electric power systems that include wind energy,
including the integration of wind power to the grid.
Dene capacity credits and compare the capacity credit of wind power to hydrocarbon-based power.
Explain how incremental wind power capacity impacts price formation, volatility, and balancing costs in an
electricity market.
Understand the factors that impact the economics of wind power generation, including the capacity factor,
the levelized cost of energy, and the efect of government policies.
Larry Parker (U.S. Congressional Research). Climate Change and the EU-Emissions Trading Scheme (ETS):
Looking to 2020.
Understand the ETS system; assess the greenhouse gas reduction commitment under the ETS and identify
the industries covered.
Understand how an auction system can address the issue of windfall prots that often accrue to power
producers under a cap and trade program like the ETS.
Identify key changes in Phase III of the ETS and understand how carbon allowances are phased out for
non-power producing industries under Phase III.
Describe the EU ETS provisions that will support industries in energy intensive, trade-exposed areas.
Chris Groobey, John Pierce, Michael Faber and Greg Broome. Project Finance Primer for Renewable Energy
and Clean Tech Projects.
Describe project nance, and explain the structure of a typical project nance agreement.
Understand the importance of power purchase agreements (PPAs) in securing project nance.
Compare diferent loan structures which can be used to raise project debt for a renewable project.
Explain how project revenues are distributed to stakeholders (i.e. the project "waterfall").
Describe key U.S. government incentive structures for renewable energy projects, including production tax
credits (PTCs), investment tax credits (ITCs), and accelerated depreciation.
FINANCIAL PRODUCTS AND RISK MANAGEMENT
FINANCIALLY TRADED ENERGY PRODUCTS AND STRUCTURED TRANSACTIONS
Exam Weight | 15%
Forward contracts and exchange traded futures
Market mechanics
Storage costs
Arbitrage theory
Valuation and hedging
Energy commodity swaps
Market mechanics
Basis swaps
Fixed-oating and oating-oating swaps
Exchange for physicals (EFP)
Options and option strategies
Market mechanics
Plain-vanilla options
Hedging using options, including collar strategies
Swing options and Volumetric Production Payments (VPPs)
Weather derivatives, CDDs and HDDs
Energy commodity exchanges
OTC derivative trade process
Global regulatory developments
Readings for Financially Traded Energy Products and Structured Transactions21 Questions
Energy Derivatives: Overview of Products, Market Mechanics and Applications
1. IEA, The Mechanics of the Derivatives Markets: What They Are and How They Function.
(Special Supplement to the Oil Market Report, April 2011).
2. Robert McDonald. Derivatives Markets. (Boston, MA: Addison-Wesley, 2013).
Chapter 6...........................Commodity Forwards and Futures (Sections 6.1 to 6.3 and 6.6 to 6.8 only)
Chapter 4...........................Energy Markets: The Instruments
AIMS:
IEA, The Mechanics of the Derivatives Markets: What They Are and How They Function.
(Special Supplement to the Oil Market Report, April 2011).
Understand the role of hedgers, speculators, and arbitrageurs in a derivatives market.
Compare and contrast forward and futures contracts and understand how they are applied.
Understand the mechanics of a futures position and calculate the margin requirements and prot on an
open futures contract.
Explain the circumstances under which you would be required to post additional margin (a margin call).
Diferentiate and apply market, limit and stop-loss orders.
Construct a hedge for a commodity position or an obligation to buy or sell a commodity by using long or
short positions in futures contracts.
Explain how basis risk can arise in a hedging transaction.
Describe the mechanics of swaps and explain the function of the swap counterparty, including swap dealers.
Calculate a periodic swap settlement payment for a multiyear energy commodity swap given forward prices
and interest rates.
Explain how the market value of a swap changes over time and describe factors afecting a swap's market value.
Explain how an implicit lending agreement is contained in a swap and describe how the interest rate is
derived from an interest rate forward curve.
Understand the diferences between American, European and Bermudan options.
Dene plain vanilla options; understand the mechanics and payof proles of call and put options.
Understand what it means for an option contract to be in, at, or out of the money.
Robert McDonald. Derivatives Markets. (Boston, MA: Addison-Wesley, 2013).
Chapter 6..............................Commodity Forwards and Futures (Sections 6.1 to 6.3 and 6.6 to 6.8 only)
Understand the basic equilibrium formula for pricing commodity forwards.
Dene carry markets, and explain the impact of storage costs and convenience yields on commodity forward
prices and no-arbitrage bounds.
Evaluate an arbitrage transaction in energy commodity forwards, and compute the potential arbitrage prot.
Compute the forward price of an energy commodity with storage costs.
Identify factors that impact electricity, natural gas, and oil forward prices.
Understand the diferences in and applications for a strip hedge and stack hedge.
Understand how to create a synthetic commodity position, and use it to explain the relationship between the
forward price and the expected future spot price.
Calculate heating degree days (HDD) and cooling degree days (CDD) and understand weather risk and the
use of weather derivatives as a risk management tool.
Chapter 4..............................Energy Markets: The Instruments
Describe the relationship between spot, forward and futures prices and identify challenges related to price
formation of energy futures.
Dene a futures contract and contrast the mark-to-market value of forward versus futures positions.
Understand the characteristics of forward price curves including backwardation and contango; construct a
forward price curve.
Describe market frictions and imperfections that can impact price formation in a forward price curve.
Dene convenience yield and understand why the concept of convenience yield is often disregarded by
market practitioners.
Compare theoretical and practical approaches to modeling the forward curve and provide advantages and
disadvantages of each.
Understand the structural diferences and cashows associated with a physical, nancial, basis, and Asian swap.
Describe the payout function and calculate payouts on the following types of options: an Asian call and put,
a call and put on a spread option, and a binary (cash-or-nothing) option
Understand the mechanics of and applications for volume-based options, including swing options and take-
or-pay options.
Structured Energy Commodity Transactions
Chapter 11...........................U.S. Natural Gas Markets
Chapter 18..........................Transactions in the Oil Markets
AIMS:
Chapter 11..............................U.S. Natural Gas Markets
Describe characteristics of the US natural gas market, including the shape and elasticity of supply and
demand curves; identify factors which explain these characteristics.
Understand the balancing mechanism and its application in the short-term natural gas market.
Explain factors contributing to price volatility in the natural gas market, including the impact of traders and speculators.
Describe the role of physical basis transactions in natural gas price formation and price reporting.
Explain how regional natural gas price indices are developed and reported.
Understand the mechanics and application of a xed-for-oating, a oating-for-oating, and a natural gas
basis swap; calculate a swap settlement for each.
Describe Exchange for Physicals (EFPs) transactions and explain their mechanics.
Understand the application of Volumetric Production Payments (VPPs), and explain the risks borne by buyers
and sellers of VPPs.
Understand how natural gas processing plants can mitigate price and spread risk through contracts including
xed-fee, percentage of proceeds, percentage of index, and keep-whole provisions.
Identify structuring solutions for managing volumetric risk, including swing options, swaps with embedded
call options, weather derivatives and tarif positions.
Chapter 18.............................Transactions in the Oil Markets
Describe the mechanics of a collar strategy, including costless collars, extendable collars, three-way and
four-way collars.
Describe the risks involved when entering into a costless collar strategy, particularly when backed by collateral.
Understand the 3-2-1 crack spread and identify potential risks faced by reneries in its application as a hedge.
Explain the mechanics of and applications for a participating swap.
Understand the indices and derivative contracts that shipping companies can use to monitor and mitigate
freight risk.
Describe the mechanics of and applications for a forward freight agreement (FFA).
Energy Commodity Exchanges and OTC Derivative Trade Process
Chapter 6...........................Energy Markets: Exchanges
6. OTC Commodity Derivatives Trade Processing Lifecycle Events. (ISDA Working Paper, April 2012).
AIMS:
Chapter 6..............................Energy Markets: Exchanges
Compare and contrast the three large energy commodity exchanges: CME NYMEX, Intercontinental Exchange
(ICE) and National Gas Exchange (NGX), and describe how trades are processed on each exchange.
Describe the structure and function of a clearinghouse, and explain the role of clearing members.
Describe the actions a clearinghouse can take when a clearing member defaults, and explain risks related to
central clearing.
Understand the SPAN system and how it is used to assess risk factors within portfolio positions.
Describe the features of Commitments of Traders (COT) reports and the advantages and disadvantages of
using COT reports by energy market participants.
Understand how Working's T-ratio can be applied to measure speculation in a commodity futures market.
Compare and contrast requirements for commercial and non-commercial traders, and for speculators and
hedgers, under the CFTC rules.
Compare the mechanics and credit implications of exchange-traded and OTC derivative transactions.
OTC Commodity Derivatives Trade Processing Lifecycle Events. (ISDA Working Paper, April 2012).
Understand the key features of the OTC commodity derivatives market.
Summarize the steps involved in processing an OTC trade and understand the action required in each step
(Trade Capture, Controls Processing, etc.).
Identify the market pricing services used to settle OTC energy contracts (i.e. PlattsGas Daily) and understand
how physical delivery may impact the settlement value.
Explain the importance of automation (i.e. "straight-through-processing") in clearing OTC energy trades;
describe the benets and weaknesses of a settlement matching process.
Describe how OTC clearing afects market transparency.
Global Regulatory Developments
7. Rajarshi Aroskar. OTC Derivatives: A Comparative Analysis of Regulation in the United States, European Union,
and Singapore.
8. Cleary and Gottlieb. Navigating Key Dodd-Frank Rules Related to the Use of Swaps by End Users.
(April 9, 2013).
9. Gordon Goodman. Swaps: Dodd-Frank Memories. (July 2, 2013).
10. Gordon Goodman. Dodd-Franks Impact on Financial Entities, Financial Activities and Treasury Afliates.
(October 23, 2013).
AIMS:
Rajarshi Aroskar. OTC Derivatives: A Comparative Analysis of Regulation in the United States, European Union,
and Singapore.
Describe the function and benets of a trade repository as it relates to OTC market participants.
Compare the regulatory requirements and regulatory authority in the United States, European Union, and
Singapore with respect to: the central clearing of OTC derivatives, requirements of central counterparties,
margin requirements for uncleared OTC derivatives, trading, and back-loading of existing OTC contracts.
Describe the requirements for reporting derivative transactions to trade repositories in the United States,
European Union and Singapore.
Cleary and Gottlieb. Navigating Key Dodd-Frank Rules Related to the Use of Swaps by End Users.
(April 9, 2013).
Dene the terms: swap dealers, major swap participants, and end users; understand how entities are assigned
to these categories under Dodd-Frank.
Understand the role of a derivatives clearing organization and describe the process for clearing a swap.
Understand the requirements for clearing a swap transaction, including swap reporting requirements.
Explain the circumstances under which an end-user exemption may be granted to a swap participant.
Gordon Goodman. Swaps: Dodd-Frank Memories. (July 2, 2013).
Understand the nancial limits a party must meet to qualify for the end-user exemption.
Explain the use of swaps for hedging purposes and how this is afected under Dodd-Frank.
Understand the de minimis and major swap participant (MSP) tests, along with other nancial obligations a
party must meet to be considered an end-user.
Understand the reporting process under Dodd-Frank, including which party is obligated to report a
transaction to a swap data repository (SDR).
Gordon Goodman. Dodd-Franks Impact on Financial Entities, Financial Activities and Treasury Afliates.
(October 23, 2013).
Explain how a nancial entity is dened under the Dodd-Frank Act and how this designation afects
mandatory clearing requirements.
Understand how the end-user exemption may apply to organizations deemed nancial entities.
ENERGY COMMODITY PRICE FORMATION AND MARKET RISKExam Weight | 15%
Data analysis tools and applications
Random variables and probability distributions
Expected value, mean, variance, and standard deviation
Skew and kurtosis
Joint and marginal probability distributions
Covariance and correlation
Minimum variance hedging
Properties of Bernoulli, Poisson and binomial distributions
Energy spot price formation:
Geometric Brownian Motion
Mean reversion
Jump difusion
Energy price volatility and modeling:
Volatility vs. variance
Historical and implied volatility
Volatility skews and smiles
Modeling processes (EWMA, GARCH, etc.)
Characteristics of energy commodity forward curves
Backwardation and contango
Market Risk Measures
The Greeks
Value-at-Risk (VaR): calculations, applications, and limitations
Backtesting VaR
Stress testing
Liquidity risk
Amaranth case study
Readings for Energy Commodity Price Formation and Market Risk21 Questions
Data Analysis Tools and Applications
1. James Stock and Mark Watson. Introduction to Econometrics: Brief Edition.
(Addison-Wesley, Third Edition, 2010).
Chapter 2...........................Review of Probability
2. Michael Miller. Mathematics and Statistics for Financial Risk Management.
(Hoboken, NJ: John Wiley & Sons, Inc., 2012).
Chapter 3...........................Basic Statistics (Applications: Portfolio Variance and Hedging Section only)
3. Svetlozar Rachev, Christian Menn and Frank Fabozzi. Fat-Tailed and Skewed Asset Return Distributions:
Implications for Risk Management, Portfolio Selection, and Option Pricing.
Chapter 2...........................Discrete Probability Distributions
AIMS:
James Stock and Mark Watson. Introduction to Econometrics: Brief Edition.
(Addison-Wesley, Third Edition, 2010).
Chapter 2 ..............................Review of Probability
Understand random variables, and distinguish between continuous and discrete random variables.
Dene, calculate, and interpret the mean, standard deviation, and variance of a random variable.
Dene and interpret the skewness and kurtosis of a distribution.
Understand and apply joint, marginal, and conditional probability functions.
Explain the diference between statistical independence and statistical dependence.
Calculate the mean and variance of sums of random variables.
Dene, calculate, and interpret the covariance and correlation between two random variables.
Describe the key properties of the normal, standard normal, multivariate normal, Chi-squared, Students t,
and F distributions.
Dene and describe random sampling and explain what is meant by i.i.d.
Describe, interpret, and apply the Law of Large Numbers and the Central Limit Theorem.
Michael Miller. Mathematics and Statistics for Financial Risk Management.
Chapter 3 ..............................Basic Statistics (Applications: Portfolio Variance and Hedging Section only)
Calculate and interpret portfolio variance and the minimum variance hedge ratio.
Svetlozar Rachev, Christian Menn and Frank Fabozzi. Fat-Tailed and Skewed Asset Return Distributions:
Implications for Risk Management, Portfolio Selection, and Option Pricing.
Chapter 2 ..............................Discrete Probability Distributions
Describe the key properties of the Bernoulli distribution, Binomial distribution, and Poisson distribution, and
identify common occurrences of each distribution.
Identify the distribution functions of Binomial and Poisson distributions for various parameter values.
Spot Price Evolution, Volatility, and Energy Forward Curves
4. Les Clewlow and Chris Strickland. Energy Derivatives: Pricing and Risk Management.
(London: Lacima Publications, 2000).
Chapter 2...........................Understanding and Analyzing Spot Prices
Chapter 3...........................Volatility Estimation in Energy Markets (Sections 3.1 to 3.2 only)
Chapter 4...........................Energy Forward Curves
AIMS:
Les Clewlow and Chris Strickland. Energy Derivatives: Pricing and Risk Management.
(London: Lacima Publications, 2000).
Chapter 2 ..............................Understanding and Analyzing Spot Prices
Understand mean reversion and its impact on spot price formation.
Identify modications to the Black Scholes-Merton model required to better replicate energy spot price behavior.
Understand why energy price jumps occur, describe the impact of jumps on spot price behavior, and explain
how jumps can be simulated.
Describe how seasonality is accounted for in energy spot price estimation.
Chapter 3 ..............................Volatility Estimation in Energy Markets (Sections 3.1 to 3.2 only)
Summarize the practical challenges of modeling energy price behavior.
Estimate volatility using historical price data.
Understand how volatility for a mean-reverting process is diferent than volatility for a non-mean-reverting process.
Understand how volatility is scaled for time.
Describe the market convention used to derive implied volatility.
Dene volatility smile or skew, explain how it is derived and understand its relationship to implied volatility.
Identify weaknesses in using a Geometric Brownian Motion process to model energy market price processes.
Describe the characteristics of a leptokurtic distribution.
Chapter 4..............................Energy Forward Curves
Compare the cost of carry in a conventional nancial futures contract and an energy futures contract.
Identify the challenges in constructing an energy forward curve.
Explain why forward electricity curves are diferent from other energy commodities and summarize the
methods used to model electricity price data.
Understand the relationship between the heat rate, input fuel prices and the electricity forward curve.
Assessing and Measuring Market Risk
5. Les Clewlow and Chris Strickland. Energy Derivatives: Pricing and Risk Management.
Chapter 9...........................Risk Management of Energy Derivatives
Chapter 10.........................Value-at-Risk
6. Allan Malz. Financial Risk Management: Models, History, and Institutions.
(Hoboken, NJ: John Wiley & Sons, 2011).
Chapter 3...........................Value-at-Risk (Sections 3.1 to 3.3 only)
Chapter 4...........................Nonlinear Risks and the Treatment of Bonds and Options (Section 4.1 only)
7. Kevin Dowd. Measuring Market Risk, Second Edition. (Hoboken, NJ: John Wiley & Sons, Inc., 2005).
Chapter 13..........................Stress Testing
Chapter 14 .........................Estimating Liquidity Risk
AIMS:
Les Clewlow and Chris Strickland. Energy Derivatives: Pricing and Risk Management.
Chapter 9..............................Risk Management of Energy Derivatives
Dene delta and understand the relationship between an options delta and the strike price for a call or put option.
Understand what it means to delta hedge an option position, calculate a proper hedge amount, and describe
the criteria used to assess and rebalance a delta hedged position.
Dene gamma and explain the process of constructing a gamma hedge and a delta-gamma hedge.
Assess the performance of a delta hedge and a delta-gamma hedge given a range of underlying futures prices.
Dene vega and understand how to neutralize the vega for an option position.
Dene factor hedging and understand how to construct a factor hedge.
Chapter 10 ............................Value-at-Risk
Understand Value-at-Risk (VaR) and its practical application.
Compare and contrast the Simple Moving Average (SMA) and Exponentially Weighted Moving Average
(EWMA) method of calculating VaR and provide advantages and disadvantages of each.
Describe the decay factor in the EWMA model and explain considerations for selecting the decay factor.
Understand the limitations of VaR as a risk management tool and calculate VaR for diferent condence levels.
Calculate the VaR of a two-security portfolio given the correlation coefcient, and explain the relationship
between correlation and VaR.
Summarize the four main methodologies for calculating VaR: Delta, Delta-Gamma, Historical and Monte
Carlo simulations.
Understand, summarize and interpret the methodologies for backtesting VaR.
Allan Malz. Financial Risk Management: Models, History, and Institutions.
(Hoboken, NJ: John Wiley & Sons, 2011).
Chapter 3 ..............................Value-at-Risk (Sections 3.1 to 3.3 only)
Describe the two key VaR parameters and describe the steps in calculating VaR.
Calculate the VaR of an asset over diferent time horizons given its annual volatility.
Understand how the short-term conditional volatility can be estimated assuming geometric Brownian motion.
Compare the exponentially weighted moving average (EWMA) and the GARCH (1,1) approaches for fore-
casting volatility, and describe the lambda () factor in an EWMA model.
Compare the parametric, Monte Carlo simulation, and historical simulation methods of calculating VaR.
Chapter 4..............................Nonlinear Risks and the Treatment of Bonds and Options (Section 4.1 only)
Describe the challenges of computing VaR for positions with nonlinear return distributions.
Dene monotonicity and explain how the presence of lack of monotonicity impacts the calculation of VaR
for an option position.
Calculate the VaR for a nonlinear exposure with monotonicity.
Explain how to calculate VaR using a Monte Carlo simulation for nonlinear exposures.
Explain the delta-gamma approach for calculating the VaR of hedged and unhedged option exposures.
Describe methods for calculating VaR for combinations of options.
Kevin Dowd. Measuring Market Risk, Second Edition. (Hoboken, NJ: John Wiley & Sons, Inc., 2005).
Chapter 13.............................Stress Testing
Understand the benets of stress testing and identify the scenarios in which stress testing is particularly
efective in assessing the magnitude of risks.
Compare the application of stress test results to VaR or expected shortfall.
Explain the difculties in designing and carrying out stress tests.
Describe the process of scenario analysis and identify guidelines for successful scenario analysis.
Explain how to evaluate the efects of each scenario in a stress test.
Describe mechanical stress testing approaches and compare mechanical stress testing to scenario analysis.
Chapter 14.............................Estimating Liquidity Risk
Dene liquidity risk and identify factors that inuence liquidity.
Understand how the bid-ask spread can be a measure of market liquidity.
Dene exogenous and endogenous liquidity.
Describe the challenges associated with estimating liquidity-adjusted VaR (LVaR).
Calculate LVaR using the constant spread approach and the exogenous spread approach.
Describe endogenous price approaches to LVaR, their motivation and limitations.
Understand the relationship between liquidation strategies, transaction costs and market price impact.
Understand liquidity at risk (LaR) and identify the factors that afect future cash ows.
Amaranth Case Study
8. Ludwig Chincarini. The Amaranth Debacle: A Failure of Risk Measures or a Failure of Risk Management?
(April 2007).
AIMS:
Ludwig Chincarini. A Case Study on Risk Management: Lessons from the Collapse of Amaranth Advisors, L.L.C.
(Journal of Applied Finance Spring/Summer 2008).
Identify the factors that led to the collapse of Amaranth Advisors LLC.
Understand the rationale and structuring of the long winter, short non-winter trading strategy used by Amaranth.
Explain how Amaranth was able to maintain net position sizes above NYMEX position limit guidelines and
summarize the implications of this action.
Understand the relative impact of market, liquidity, and funding risk on Amaranth's portfolio.
CREDIT, COUNTERPARTY, AND COUNTRY RISK ASSESSMENTExam Weight | 15%
Fundamental credit assessment
Financial statement and ratio analysis
Credit ratings, scoring and risk modeling
Credit exposure metrics
Expected loss
Loss given default
Probability of default
Counterparty credit exposures, pricing, mitigation and documentation
Settlement and replacement risk
Potential future exposure
Netting agreements
Collateralization
Credit Value Adjustment (CVA)
ISDA Master and Credit Support Annex
Central counterparty clearing
Netting, collateralization, insurance, and mutualization
Wrong-way risk
Country risk assessment
Readings for Credit, Counterparty, and Country Risk Assessment21 Questions
Fundamental Credit Assessment and Risk Exposure
1. Betty Simkins and Russell Simkins, eds. Energy Finance and Economics: Analysis and Valuation,
Risk Management, and the Future of Energy.
Chapter 9...........................Financial Statement Analysis for Oil and Gas Companies and Competitive Benchmarking
2. Markus Burger, Bernhard Graeber, and Gero Schindlmayr. Managing Energy Risk: An Integrated View on Power
and Other Energy Markets. (Hoboken, NJ: John Wiley & Sons, 2007).
Chapter 6.3 .......................Risk Management (Credit Risk Section only)
AIMS:
Betty Simkins and Russell Simkins, eds. Energy Finance and Economics: Analysis and Valuation,
Risk Management, and the Future of Energy.
Chapter 9..............................Financial Statement Analysis for Oil and Gas Companies and Competitive Benchmarking
Understand the relationship between various nancial statements including the balance sheet, income
statement, statement of cash ows, and statement of retained earnings.
Describe the process of competitive benchmarking and use this process to compare an energy companys
nancial ratios against those of similar competitors.
Dene and calculate free cash ow and operating cash ow.
Calculate and interpret common nancial statement metrics used to assess liquidity, debt coverage, prot-
ability and return on equity.
Calculate and interpret common metrics used to assess the value of hydrocarbon assets, reserves, and the
efciency of exploration and production activity.
Markus Burger, Bernhard Graeber, and Gero Schindlmayr. Managing Energy Risk: An Integrated View on Power
and Other Energy Markets. (Hoboken, NJ: John Wiley & Sons, 2007).
Chapter 6.3...........................Risk Management (Credit Risk Section only)
Dene and understand the relationship between settlement risk and replacement risk and how each is calculated.
Summarize external credit ratings and related default probabilities.
Identify common internal rating factors and explain their application.
Counterparty Credit Risk
3. Allan Malz. Financial Risk Management: Models, History, and Institutions.
Chapter 6...........................Credit and Counterparty Risk (Sections 6.1 to 6.4 only)
4. Jon Gregory. Counterparty Credit Risk and Credit Value Adjustment: A Continuing Challenge for Global
Financial Markets, 2nd Edition. (West Sussex, UK: John Wiley & Sons, 2012).
Chapter 3...........................Dening Counterparty Credit Risk
AIMS:
Allan Malz. Financial Risk Management: Models, History, and Institutions.
Chapter 6..............................Credit and Counterparty Risk (Sections 6.1 to 6.4 only)
Summarize the various levels of debt seniority including their respective security, collateral and priority .
Calculate and interpret the expected loss, loss given default, probability of default, and expected return
for a credit risk exposure.
Understand how credit ratings, rating migration, internal ratings, and credit risk models are applied.
Dene counterparty risk, and understand how counterparty risk is diferent from credit risk.
Dene Credit VaR (Value-at-Risk).
Jon Gregory. Counterparty Credit Risk and Credit Value Adjustment: A Continuing Challenge for Global
Financial Markets, 2nd Edition. (West Sussex, UK: John Wiley & Sons, 2012).
Chapter 3 ..............................Dening Counterparty Credit Risk
Diferentiate between counterparty risk and lending risk.
Identify transactions that carry counterparty risk and understand how counterparty risk can arise in each.
Diferentiate between settlement risk and pre-settlement risk.
Dene credit exposure, credit migration, recovery, mark-to-market, replacement cost, default probability,
loss given default and the recovery rate.
Describe the tools available to manage or mitigate counterparty risk.
Understand how counterparty risk is quantied and briey describe credit value adjustment (CVA).
Summarize how counterparty risk is hedged and identify the factors used to assess capital requirements
for counterparty risk.
Counterparty Risk Mitigants: Netting, Collateral, Central Counterparty Clearing
Financial Markets, 2nd Edition.
Chapter 4...........................Netting, Compression, Resets and Termination Features
Chapter 5...........................Collateral
Chapter 7...........................Central Counterparties
AIMS:
Financial Markets.
Chapter 4..............................Netting, Compression, Resets and Termination Features
Understand the application of an ISDA master agreement.
Summarize netting and close-out procedures (including multilateral netting), explain their advantages and
disadvantages, and describe how they t into the framework of the ISDA master agreement.
Describe the efectiveness of netting in reducing credit exposure under various scenarios.
Understand the mechanics of termination provisions found in credit contracts.
Understand the use of walkaway features in credit contracts and explain the disadvantages of using
walkaway features.
Chapter 5 ..............................Collateral
Explain the rationale for and the mechanics of collateralization.
Describe features of a credit support annex (CSA) within the ISDA Master Agreement and identify parameters
which are typically included in the CSA.
Dene collateralization and explain the mechanics of the collateralization process, including the role of a
valuation agent, the types of collateral that are typically used, and reconciliation of collateral disputes.
Understand the features of a collateralization agreement including links to credit quality, margining, thresholds,
independent amount, minimum transfers, rounding, haircuts, and rehypothecation.
Diferentiate between a two-way and one-way CSA agreement and describe how collateral parameters can
be linked to credit quality.
Chapter 7 ..............................Central Counterparties
Understand the role of a Central Counterparty (CCP) in clearing nancial transactions, particularly the efect
a CCP has on risk allocation and its potential impact on systemic risk.
Understand how a product or transaction is assessed for its ability to be cleared through a CCP.
Explain how a CCP manages a default, particularly how netting is employed in such a circumstance.
Summarize the nancial waterfall used by a CCP to absorb a default.
Compare initial and variation margin; summarize the VaR approach used to determine initial margin.
Identify the challenges faced by CCPs when determining the initial margin for a transaction.
Understand the application of reserve funds, capital calls, and loss mutualization.
Understand how CCPs can create moral hazard among market participants.
Summarize the steps a CCP may take to replace or port a defaulted exposure.
Explain how a CCP can fail.
Measuring Counterparty Credit Exposure
Financial Markets, 2nd Edition.
Chapter 8...........................Credit Exposure (Sections 8.1 to 8.4 only)
Chapter 10.........................Default Probability, Credit Spreads and Credit Derivatives (Section 10.1 only)
Chapter 12..........................Credit Value Adjustment (Section 12.1 only)
Chapter 15..........................Wrong-Way Risk (Sections 15.1 to 15.2 and 15.4.4 only)
AIMS:
Financial Markets.
Chapter 8 ..............................Credit Exposure (Sections 8.1 to 8.4 only)
Understand the metrics used to quantify credit exposure, including expected mark-to-market, expected
exposure, potential future exposure, expected positive exposure, efective exposure, and maximum exposure.
Compare and contrast credit exposure and Value-at-Risk.
Identify factors that afect the calculation of the credit exposure prole and summarize the impact of
collateral on exposure.
Identify typical credit exposure proles for swaps, options, and credit derivatives.
Explain how payment frequencies and exercise dates afect the exposure prole of various securities.
Explain the impact of netting on future exposure.
Describe the impact of correlation on the netting benet and calculate the netting factor.
Dene the margin period of risk and assess the risk associated with the remargining period.
Chapter 10 ............................Default Probability, Credit Spreads and Credit Derivatives (Section 10.1 only)
Explain the diference between cumulative and marginal default probabilities.
Calculate risk-neutral default probabilities, and compare the use of risk-neutral and real-world default
probabilities in pricing derivative contracts.
Describe the following approaches for estimating price: the historical data approach, equity based approach,
and risk neutral approach.
Explain how recovery rates may be estimated.
Chapter 12.............................Credit Value Adjustment (Section 12.1 only)
Explain the motivation for and challenges of pricing counterparty risk.
Dene credit value adjustment (CVA) and calculate CVA assuming wrong-way risk does not exist.
Calculate an approximation for the CVA spread in the absence of netting or collateralization.
Chapter 15.............................Wrong-Way Risk (Sections 15.1 to 15.2 and 15.4.4 only)
Understand the origins of wrong-way risk and identify situations where wrong-way risk is present.
Identify examples of right-way risk (right-way exposure).
Explain how trades involving the following nancial products can introduce wrong-way risk: put options,
commodity swaps and credit default swaps.
Summarize the process of calculating CVA and expected exposure when wrong-way risk is present.
Country Risk Assessment
7. Daniel Wagner. Managing Country Risk. (Boca Raton, FL: CRC Press, 2012).
Chapter 3...........................Assessing Country Risk
Chapter 4...........................Country Risk Assessment in Practice
AIMS:
Daniel Wagner. Managing Country Risk. (Boca Raton, FL: CRC Press, 2012).
Chapter 3 ..............................Assessing Country Risk
Identify characteristics and guidelines leading to efective country risk analysis.
Identify key indicators used by rating agencies to analyze a countrys debt and political risk, and describe
challenges faced by country risk analysts in using external agency ratings.
Describe factors which are likely to lead to political stability or instability within a country.
Describe the J-curve and how it can explain a countrys level of political stability and openness.
Identify and explain factors that can impact the relative country risk associated with two nations.
Chapter 4..............................Country Risk Assessment in Practice
Explain key considerations when developing and using analytical tools to assess country risk, including the
challenge of choosing among diferent key indicators to use.
Describe a process of generating a ranking system and selecting risk management tools to compare the risk
among countries.
Identify and explain a variety of qualitative and quantitative variables and measures that can be used to
assess country risk.
Identify and compare alternative measures and indices that can be useful in assessing country risk.
ENTERPRISE RISK MANAGEMENT AND BUSINESS ETHICSExam Weight | 5%
Enterprise risk management (ERM) framework
Determining and communicating risk appetite and risk tolerance
Quantitative and qualitative risk metrics
Key Risk Indicators (KRIs)
Key Performance Indicators (KPIs)
Heat maps and MARCI (Mitigate, Assure, Redeploy, and Cumulative Impact)
Implications of E3 and a Complex Infrastructure System (CIS)
The GARP Code of Conduct
Readings for Enterprise Risk Management and Business Ethics7 Questions
Enterprise Risk Management (ERM) Framework
1. COSO, Understanding and Communicating Risk Appetite. (January 2012).
2. COSO, Risk Assessment in Practice. (October 2012).
3. COSO, Developing Key Risk Indicators to Strengthen Enterprise Risk Management. (December 2010).
4. John Fraser and Betty Simkins. Enterprise Risk Management: Todays Leading Research and Best Practices
for Tomorrows Executives. (Hoboken, NJ: John Wiley & Sons, 2010).
Chapter 8...........................Identifying and Communicating Key Risk Indicators
Chapter 16 .........................Operational Risk Management
5. Robert Bea, Ian Mitrof, Daniel Farber, Howard Foster and Karlene H. Roberts. A New Approach to Risk:
The Implications of E3. (Palgrave Macmillan 2009).
AIMS:
COSO, Understanding and Communicating Risk Appetite. (January 2012).
Dene risk appetite and explain the role of risk appetite in corporate governance.
Describe considerations a rm must make in determining its risk appetite, and explain how an organizations
risk appetite can difer for various risk factors.
Describe the objective and characteristics of an efective risk appetite statement.
Diferentiate between risk appetite and risk tolerance, and explain how an organization can align its risk
tolerance to its risk appetite.
Explain how an organization can develop, communicate, monitor and update its risk appetite.
COSO, Risk Assessment in Practice. (October 2012).
Describe the steps in the risk assessment process.
Compare impact, likelihood, vulnerability, and speed of onset of potential risk events and explain how a scale
can be created to assess these four factors with respect to specic potential risk events.
Identify examples of actions a rm can take to reduce its vulnerability to specic risk events.
Compare and contrast qualitative and quantitative measurement techniques in assessing risks, and describe
examples of each.
Describe methods to capture interactions between risk factors, including risk interaction maps and the
bow-tie diagram.
Explain how a risk hierarchy can be created to rank and prioritize risks.
Explain the use of heat maps and MARCI (Mitigate, Assure, Redeploy, and Cumulative Impact) charts in
aggregating, comparing, and prioritizing risks faced by a rm.
COSO, Developing Key Risk Indicators to Strengthen Enterprise Risk Management. (December 2010).
Diferentiate between key performance indicators (KPIs) and key risk indicators (KRIs).
Describe some qualities of efective KRIs.
Explain considerations and challenges faced by a rm in the process of developing KRIs.
Explain how a rm can gather information used in developing KRIs.
Describe how KRIs can be reported, monitored, updated and communicated.
Explain ways that KRIs can provide value to an organization.
John Fraser and Betty Simkins. Enterprise Risk Management: Todays Leading Research and Best Practices
for Tomorrows Executives. (Hoboken, NJ: John Wiley & Sons, 2010).
Chapter 8 ..............................Identifying and Communicating Key Risk Indicators
Dene Key Risk Indicators (KRIs) and explain their application in risk management.
Explain the diference between KRIs and Key Performance Indicators; understand the role each plays within
a risk management strategy.
Apply KRIs to a company's existing risk management strategy, given a set of parameters.
Describe the parameters for creating efective KRIs and how KRIs can then be aligned to support an
organization's risk management strategy.
Explain how KRIs are used to monitor risk exposures on an ongoing basis and how KRIs help to calibrate risk
management strategies.
Analyze the stakeholders, metrics and risk appetite inputs and explain how they are used to craft a set of
KRIs for an organization.
Explain the challenges an organization may face in adopting KRIs for risk management.
Chapter 16.............................Operational Risk Management
Explain the potential impact that operational risk can have on an organization.
Describe the diference between "good risk" and "reckless risk".
Dene risk tolerance and risk appetite; explain their efect on the risk management strategy of an organization.
Identify and explain the elements of an efective risk management strategy.
Describe the Bowtie Model of risk assessment; explain its associated strategies and actions.
Summarize the selection criteria for managing risk in a given scenario.
Robert Bea, Ian Mitrof, Daniel Farber, Howard Foster and Karlene H. Roberts. A New Approach to Risk:
The Implications of E3. (Palgrave Macmillan 2009).
Describe the factors used to assess risk in a complex organization or system.
Understand the interdisciplinary aspect of modeling risk associated with a complex system.
Identify and understand the implications of a Type Three Error (E3).
Summarize the elements used in a Complex Infrastructure System (CIS) risk assessment.
Explain why human error may be overlooked in risk assessment and why engineering analyses often
underestimate the probability of a system failure.
GARP Code of Conduct
6. Global Association of Risk Professionals (GARP). Code of Conduct.
AIMS:
Global Association of Risk Professionals (GARP). Code of Conduct.
Describe the responsibility of each GARP member with respect to professional integrity, ethical conduct,
conicts of interest, condentiality of information and adherence to generally accepted practices in
risk management.
Describe the potential consequences of violating the GARP Code of Conduct.
NOTES
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2014 Energy Oversight Committee (EOC) Members
Ken Abbott.........................................Morgan Stanley & Company
Richard Apostolik............................Global Association of Risk Professionals
Dr. Lawrence Austen......................Tragura
Gordon E. Goodman*.....................Alliance Risk Group
Jef Jewell ..........................................DTE Energy
Glenn Labhart, EOC Chair............Labhart Risk Advisors
Alessandro Mauro ...........................Litasco SA
Mark D. May .......................................Phillips 66
Shawnie McBride.............................Direct Energy
Jef Parke............................................Koch Industries, Inc.
Ken Robinson....................................Calpine
Michael Sell ........................................Global Association of Risk Professionals
Jonathan C. Stein ............................Hess Corporation
Dr. Chris Strickland.........................Lacima Group
Dr. Glen Swindle...............................Scoville Risk Partners
John Wengler....................................Centrica plc
*Retired, Occidental Petroleum
Creating a culture of
risk awareness
Global Association of
Risk Professionals
111 Town Square Place
14th Floor
Jersey City, New Jersey 07310
U.S.A.
+ 1 201.719.7210
2nd Floor
Bengal Wing
9A Devonshire Square
London, EC2M 4YN
U.K.
+ 44 (0) 20 7397 9630
www.garp.org
2014 Global Association of Risk Professionals. All rights reserved. 5-8-14
About GARP | The Global Association of Risk Professionals (GARP) is a not-for-prot global membership organization dedicated to
preparing professionals and organizations to make better informed risk decisions. Membership represents over 150,000 Members and
Afliates from banks, investment management rms, government agencies, academic institutions, and corporations from more than
195 countries and territories. GARP administers the Financial Risk Manager (FRM) and the Energy Risk Professional (ERP) Exams;
certications recognized by risk professionals worldwide. GARP also helps advance the role of risk management via comprehensive
professional education and training for professionals of all levels. www.garp.org.

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