erp_2012aimstatements

2012 ERP®

ExaminationAIM Statements

2012 Energy Risk Professional (ERP®) Examination AIM Statements

© 2012 Global Association of Risk Professionals. All rights reserved. 1

INTRODUCTION

The ERP Study Guide sets forth primary and secondary topics covering physical energy

assets, operations and financial energy markets; as well as the techniques used to manage

risk across the entire energy value chain. All topics and corresponding readings were

selected in conjunction with the Energy Oversight Committee (EOC) and reflect the fund-

amental knowledge and tools necessary for professionals that manage risk in the energy

industry.

The Applying Instructional Materials Statements (AIMS) serve as an additional study

resource that can be used in conjunction with the 2012 Study Guide and as a complement

to the 2012 Study Strategies Guide, respectively. The AIMs are designed to provide addi-

tional guidance and support for identifying fundamental learning objectives within each core

reading outlined in the Study Guide and to reinforce the key concepts and quantitative

relationships summarized in the Study Strategies Guide.

The AIMs are designed to

provide additional guidance

and support for identify-

ing fundamental learning

objectives within each core

reading outlined in the

Study Guide and to rein-

force the key concepts and

quantitative relationships

summarized in the Study

Strategies Guide.

Test Weights and Question Allocation for the 2012 ERP Examination

Test weights and question allocation for the 2012 ERP examination have been revised,

reflecting a shift in emphasis of certain knowledge and skills. Moreover, these changes reflect

a desire to create an exam that properly balances the competing goals of intellectual rigor

against exam validity and reliability in relation to current market conditions—important

components of any professional certification exam.

Physical Energy Markets

• Hydrocarbon Resources 25% 40 questions

• Electricity Production and Distribution 10% 16 questions

• Renewable Energy Sources and Carbon Emissions 10% 16 questions

Section Total 45% 72 questions

Financial Markets

• Financial Products and Valuation 20% 32 questions

• Modeling Energy Price Behavior 10% 16 questions

• Risk Evaluation and Management 15% 24 questions

Section Total 45% 72 questions

Current Issues in Energy 10% 16 questions

Exam Total 100% 160 questions

Table of Contents

Hydrocarbon Resources...........................................................................................................3

Electricity .......................................................................................................................................9

Renewable Energy and Carbon Emissions ......................................................................13

Financial Products.....................................................................................................................16

Modeling Energy Prices ..........................................................................................................21

Risk Management Fundamentals .......................................................................................25

Current Issues in Energy........................................................................................................29



HYDROCARBON RESOURCES—Exam Weight | 25%

• Exploration and Production

• Crude Oil and Refining

• Synthetics

• Natural Gas, LNG and Shale Gas

• Coal

Hydrocarbon Resources

1.1 Exploration and Production

1. Institut Français du Petrolé Publications. Oil, Gas Exploration, and Production: Reserves, Costs, Contracts.

(Paris: Editions Technip, 2007).

• Chapter 3.......................Hydrocarbon Reserves

2. Charlotte Wright & Rebecca Gallun. Fundamentals of Oil & Gas Accounting, 5th Edition (Tulsa, OK:

PennWell, 2008).

• Chapter 1 ........................Upstream Oil & Gas Operations

• Chapter 15 .....................Accounting for International Petroleum Operations

AIMS:Institut Français du Petrolé Publications. Oil, Gas Exploration, and Production: Reserves, Costs, Contracts.

Chapter 3 ..........................Hydrocarbon Reserves

• Understand how reserves differ from resources and how that difference affects project economics.

• Know how reserve probabilities like P90 are calculated and their relationship to 1P, 2P and 3P reserves.

• Understand what is covered by the term “nonconventional hydrocarbons;” know the types, where they are

found, and how they differ from conventional hydrocarbons.

• Discuss the impact of technical progress on the production profile for a given well.

• Be generally familiar with the location of major oil reserves and production sites.

Charlotte Wright & Rebecca Gallun. Fundamentals of Oil & Gas Accounting.

Chapter 1 ...........................Upstream Oil & Gas Operations

• Know the difference between integrated and independent oil companies.

• Know the difference between “permeability” and “porosity.”

• Understand how subsurface geologic structures affect oil and gas production.

• Discuss mineral rights and interests, particularly hydrocarbon ownership regimes.

• Explain the difference between the acquisition and leasing of rights for exploration and production.

• Understand the technical aspects of drilling operations and know the stages in the hydrocarbon recovery

process.

• Demonstrate understanding of the offset clause, royalty payments and other lease provisions.

4 © 2012 Global Association of Risk Professionals. All rights reserved.


Chapter 15 .........................Accounting for International Petroleum Operations

• Know the major types of fiscal systems used in petroleum contracts around the world: concessionary systems,

contractual systems, production sharing or service contracts.

• Calculate the gross revenue payout to each party under a concessionary system.

• Calculate the royalty payout under a production sharing or service contract.

• Know what profit oil is and its application.

• Know how a joint operating agreement works and under what circumstances it is used.

• Understand the main accounting regulations that affect petroleum contracts.

1.2 Crude Oil and Refining

1. Norman J. Hyne. Nontechnical Guide to Petroleum Geology, Exploration, Drilling, and Production, 2nd Edition

(Tulsa, OK: PennWell Books, 2001).

• Chapter 1 ........................Nature of Gas and Oil

(only sections titled: “Petroleum, Chemical Composition, and Crude Oil”)

2. Thomas O. Miesner and William L. Leffler. Oil and Gas Pipelines in Nontechnical Language (Tulsa, OK: PennWell

Books, 2006).

• Chapter 10.....................Investment Decisions

• Chapter 12 .....................Engineering and Design

3. Purvin & Gertz, Inc. The Role of WTI as a Crude Oil Benchmark.

• Section Three...............The Role of WTI

4. William L. Leffler. Petroleum Refining in Nontechnical Language, 3rd Edition (Tulsa, OK: PennWell, 2000).

• Chapter 20....................Simple and Complex Refineries

5. Bunkerworld. D2 and No.2 Diesel Fuel: An Introduction

AIMS:Norman J. Hyne. Nontechnical Guide to Petroleum Geology, Exploration, Drilling, and Production.

Chapter 1 ..........................Nature of Gas and Oil, sections titled Petroleum, Chemical Composition, and Crude Oil

• Understand the relationship between American Petroleum Institute (API) ratings and sulfur content in

determining the grading of crude oil.

• Discuss the characteristics of different “benchmark” crude oils.

• Understand the refining process, specifically “cracking” and how it affects product yields.

• Know the products created in the refining of crude oil, also know what impurities must be removed in the

refining process.

• Know the different units of measure for crude oil and natural gas.

• Know the terms black oil, volatile oil, retrograde gas, wet gas, and dry gas and how they impact the

productivity of an oil field.



Thomas O. Miesner and William L. Leffler. Oil and Gas Pipelines in Nontechnical Language.

Chapter 10.........................Investment Decisions

• Identify the stakeholders and explain the decision process for building a pipeline.

• Define: demand-driven, supply-driven, and market-driven scenarios and know how they will impact pipeline

development decisions.

• Discuss economic issues associated with the decision to build a pipeline.

• Explain the common methods for setting pipeline rates: i.e. the Cost of Alternative Transportation and location

differentials.

• Be able to explain how the sale/purchase price for a pipeline is determined.

• Know the role of a Master Limited Partnership.

Chapter 12 .........................Engineering and Design—Pipelines and Storage

• Understand the basics of and key considerations for building a pipeline, including safety, routing decisions and

storage possibilities.

• Understand the need for station locations along pipeline routes.

• Discuss the importance of different types of storage, including factors like location and seasonality.

• Understand the barriers to pipeline design and construction.

Purwin & Gertz, Inc. The Role of WTI as a Crude Oil Benchmark, Section III.

• Understand the major historical events that have shaped the crude oil market and the establishment of a

global pricing mechanism for crude oil.

• Know the role of a benchmark price, and its relationship to other pricing data.

• Discuss the Cushing Hub—its role in pricing and its limitations in distribution.

• Explain the historic role OPEC has had in establishing global oil prices.

• Understand the relationship between futures contracts and physical supply.

• Define the term “parity pricing” and understand parity relationships.

• Understand the impact of geography in establishing crude oil prices.

William L. Leffler. Petroleum Refining in Nontechnical Language, 3rd Edition.

Chapter 20........................Simple and Complex Refineries

• Discuss the operating characteristics of a simple and complex refinery.

• Know the factors that determine refinery complexity.

• Understand the role refining margin plays in setting a price.

• Outline how supply and demand impacts the pricing of various types of crude oil.

• Describe how crude oil prices are established; including how complex refineries can increase their margin by

refining heavy crude oil.

Bunkerworld. D2 and No.2 Diesel Fuel: An Introduction.

• Understand what is meant by the term “bunker fuel.”

• Know the classifications for bunker fuel, particularly for type No. 2 or D2.

• Understand how D2 prices are set and quoted.



1.3 Synthetics

1. Michael Toman, Aimee E. Curtright, David S. Ortiz, Joel Darmstadter, Brian Shannon. Unconventional Fossil-

Based Fuels: Economic and Environmental Trade-Offs. (Santa Monica, CA: Rand, 2008).

• Chapter 4.......................Oil Sands and Synthetic Crude Oil

2. James T. Bartis, Frank A. Camm and David S. Ortiz. Producing Liquid Fuels from Coal: Prospects and Policy

Issues (Santa Monica, CA: Rand, 2008).

• Chapter 3.......................Coal-to-Liquids Technologies

• Chapter 6.......................Critical Policy Issues for Coal-to-Liquids Development

AIMS:Michael Toman, Aimee E. Curtright, David S. Ortiz, Joel Darmstadter, Brian Shannon. Unconventional

Fossil-Based Fuels: Economic and Environmental Trade-Offs.

Chapter 4 ..........................Oil Sands and Synthetic Crude Oil

• Know the products produced from bitumen.

• Describe the geographical location and production estimates for bitumen reserves.

• Understand the challenges posed by extracting bitumen from oil sands.

• Discuss methods of extraction from oil-sands including potential constraints on the various extraction.

methods, production, and applications for oil sands (e.g., competition and environmental).

• Understand how natural gas prices affect the economics of synthetic crude oil production.

James T. Bartis, Frank A. Camm and David S. Ortiz. “Producing Liquid Fuels from Coal: Prospects and

Policy Issues.”

Chapter 3 ..........................Coal-to-Liquids Technologies

• Explain how the Fischer-Tropsch (F-T) process for converting coal to liquids works.

• Know the commodities produced by the F-T process (i.e., diesel, jet fuel, naphtha) and how the F-T process

increases the value of coal.

• Explain the environmental issues associated with coal-derived liquid fuels as well as solutions

(i.e., sequestration and other methods).

• Discuss the current use and potential for commercial development of coal-to-liquid technologies.

Chapter 6 ..........................Critical Policy Issues for Coal-to-Liquids Development

• Discuss the environmental impacts of coal-to-liquids production.

• Understand the challenges facing coal-to-liquids production projects, including governmental regulations,

access to resources and potential environmental impacts.

1.4 Natural Gas, LNG and Shale Gas

1. Davis W. Edwards. Energy Trading and Investing (New York: McGraw-Hill, 2010).

• Chapter 2.1.....................Natural Gas



2. Vivek Chandra. Fundamentals of Natural Gas: An International Perspective (Tulsa, OK: PennWell Books, 2006).

• Chapter 1 ........................The Basics

• Chapter 2.......................Transport and Storage

• Chapter 3.......................Gas Usage

• Chapter 4.......................Contracts and Project Development

3. Frank Fabozzi (ed.): The Handbook of Commodity Investing (Hoboken, NJ: John Wiley & Sons, 2008).

• Chapter 36 ....................The Natural Gas Market in the United Kingdom

4. Department of Energy Publication: Liquefied Natural Gas: Understanding the Basic Facts.

5. PriceWaterhouseCoopers: Today’s LNG Market Dynamics.

6. Kenneth Medlock. Impact of Shale Gas Development on Global Gas Markets (Wiley Periodicals, Inc., 2011).

AIMS:Davis W. Edwards. Energy Trading and Investing.

Chapter 2.1 ........................Natural Gas

• Know the standard heat/volumetric measurements for natural gas.

• Define the terms hub, citygate, basis price and know their relevance for natural gas contracts.

• Know how natural gas is traded; understand common types of natural gas trades.

• Understand the Henry Hub’s role in setting the basis price for natural gas trades.

• Discuss the spot/forward price relationship in the natural gas market.

Vivek Chandra. Fundamentals of Natural Gas: An International Perspective.

Chapter 1 ...........................The Basics

• Know what constitutes “liquefied petroleum gas,” “natural gas liquids” and “condensates,” and how they relate

to natural gas.

• Define the natural gas terms: wet, dry, sweet, sour and associated.

• Know the common units of measure for natural gas.

• Understand how subsurface processes convert organic matter into hydrocarbons.

• Know the Society of Petroleum Engineers system for classifying reserves.

• Be able to calculate the gas/oil ratio for a given field.

• Be familiar with Coal Bed Methane and understand how this source fits into the range of natural gas resources.

Chapter 2...........................Transport and Storage

• Know the basics of pipeline transportation.

• Understand the reasons why liquefying natural gas would be chosen over pipeline shipment of natural gas.

• Know the measurements used with liquefied natural gas and the energy content of LNG.

• Be familiar with the typical costs incurred at each stage of the LNG value chain.

• Understand the reasons why natural gas is stored.

• Know the benefits/drawbacks for each of the most common structures for storing natural gas.



Chapter 3 ..........................Gas Usage

• Know how natural gas is used to generate electricity.

• Understand the differences between conventional and combined cycle gas power plants.

• Be familiar with the gas-to-liquids (GTL) process; know the commodities produced and the economic

decisions behind the construction of a GTL plant.

• Know what syngas is and its role in the GTL process.

• Be familiar with the use of natural gas as a transportation fuel.

• Understand the role a local distribution company plays in supplying natural gas to residential consumers.

Chapter 4 ..........................Contracts and Project Development

• Know the mechanics of a gas sales agreement (GSA), in particular: take-or-pay obligations, nominations

and force majeure.

• Understand how a sales and purchase agreement for LNG is similar to a GSA for natural gas.

• Understand how and why some regions index LNG prices to crude oil (i.e. the JCC price in Japan).

• Know the terms free-on-board (FOB) and cost-insurance-freight (CIF) and the impact they have on an

LNG contract.

• Be familiar with the phases of project development for a gas project.

• Know the types of contracts engaged in during the execution of project development and their primary

differences.

Frank Fabozzi (ed.). The Handbook of Commodity Investing.

Chapter 36 ........................The Natural Gas Market in the United Kingdom

• Understand natural gas’ relationship to other commodities, including cross-commodity correlations.

• Understand the physical and financial drivers in the UK natural gas market.

• Know what the National Balancing Point is and the role it plays in setting prices.

• Define the role risk and volatility play in the natural gas market.

• Identify the fundamental price drivers in the UK natural gas market.

• Know how swing valuation and the cost of risk are accounted for in contracts.

Department of Energy. Liquefied Natural Gas: Understanding the Basic Facts.

• Be familiar with global flows in the LNG market and the main LNG exporting countries.

• Identify the fundamental components of the LNG value chain.

• Understand the operation of an LNG “train.”

• Explain how and why LNG is used for Peak Shaving.

• Know the standard LNG units of measure and their heating values.

• Explain the role of the LNG spot market in setting global prices and how it has developed in recent years.

PriceWaterhouseCoopers. Today’s LNG Market Dynamics.

• Know the factors that affect the long-term supply of LNG, including unconventional reserves and floating

production sites.

• Know the term “stranded gas.”

• Understand the pricing methodology for natural gas in the Asian markets.

• Understand the arguments for why global LNG price will converge to a single market price and if short-term

contracts will become the industry standard.



Kenneth Medlock. Impact of Shale Gas Development on Global Gas Markets.

• Know how shale gas resources are evaluated.

• Understand how potential shale gas reserves in North America could affect global LNG trade patterns.

• Explain how and why prices at Henry Hub have diverged from other global natural gas pricing points.

• Know the current and possible future role of oil indexation in setting global natural gas prices.

• Understand how shale gas development could be hampered by future environmental policies.

1.5 Coal

1. James Speight. Handbook of Coal Analysis (Wiley-Interscience, 2005).

• Chapter 1 ........................Coal Analysis

• Chapter 2.......................Sampling and Sample Preparation

AIMS:James Speight. Handbook of Coal Analysis.

Chapter 1 ...........................Coal Analysis

• Know the four major grades (or ranks) of coal.

• Understand why certain ranks of coal are more valuable than others.

• Know the terms “accuracy” and “precision” in relation to coal sampling.

• Understand the factors that go into the classification of a given sample of coal.

Chapter 2...........................Sampling and Sample Preparation

• Understand how the method used to obtain a coal sample can impact the analysis of that sample.

• Know which sampling techniques are considered to be the most/least accurate.

• Know why coal samples are washed.

• Explain why coal is considered a heterogeneous material.

ELECTRICITY—Exam Weight | 10%

• Electricity Generation

• Hydroelectric and Nuclear Power

• Fundamentals of Electricity Distribution and Trading

• Load Forecasting

Electricity Generation, Distribution and Trading

2.1 Electricity Generation


• Chapter 2.2 ...................Electricity



2. Chris Harris. Electricity Markets: Pricing, Structures and Economics (West Sussex, England:

John Wiley & Sons, 2006).

• Chapter 7.......................Location

3. Sally Hunt. Making Competition Work in Electricity (New York: John Wiley & Sons, Inc., 2002).

• Chapter 2.......................The Essential Aspects of Electricity


Chapter 2.2 .......................Electricity

• Discuss the elements of standard market design.

• Understand how regional electricity markets operate and the role of the RTO/ISO in market operations.

• Explain when a generator would be activated “out-of-merit-order.”

• Understand the role nodes, zones, and hubs play in electricity distribution.

• Define “heat rate” and “spark spread” and explain how each is used to set market prices.

Chris Harris. Electricity Markets: Pricing, Structures and Economics.

Chapter 7...........................Location

• Describe why locational issues are important for electrical systems; list the requirements for locational charging.

• Understand how losses are modeled, including market-based models for modeling losses.

• Define “constraint” and its effect on electricity markets.

• Thoroughly understand the zonal, nodal, and postage stamp pricing models and the role of financial.

transmission rights in the distribution of electricity.

• Understand the issues surrounding interconnectivity as outlined in the case studies.

Sally Hunt. Making Competition Work in Electricity.

Chapter 2...........................The Essential Aspects of Electricity

• Describe “generation,” “transmission,” “wholesale” and “distribution” and their interconnectedness.

• Understand the roles and risks associated with competition in the electricity markets.

• Understand what is involved in the actual physical delivery of electricity.

• Define “daily load curve” and state why it is important.

• Understand the role monopolies have played in the development of the power industry and the effect

regulation has had on monopolies.

• Be able to give examples of daily load and daily price curves for a given market.

2.2 Hydroelectric and Nuclear Power

1. Ann Chambers. Renewable Energy in Nontechnical Language (Tulsa, OK: PennWell Books, 2006).

• Chapter 6.......................Hydroelectric

2. Roy L. Nersesian. Energy for the 21st Century: A Comprehensive Guide to Conventional and Alternative Sources

(Armonk, NY: M.E. Sharpe, Inc., 2007).

• Chapter 8.......................Nuclear and Hydropower



3. David Schlissel and Bruce Biewald. Nuclear Power Plant Construction Costs (Synapse Energy Economics, Inc.).

4. Peter Coy. The Prospect for Safe Nuclear (Bloomberg Businessweek, March 24, 2011).

AIMS:Ann Chambers. Renewable Energy in Nontechnical Language.

Chapter 6 ..........................Hydroelectric

• Know hydropower’s share of the world’s energy markets, identify major hydro projects around the world.

• Be able to explain the basic mechanics of a hydropower plant.

• Understand the major regulations regarding hydropower.

• Discuss the environmental issues surrounding the construction and operation of hydropower plants.

• Be familiar with the two case studies cited in the chapter (Hawaii and Brazil) and understand their impact on

the market.

Roy L. Nersesian. Energy for the 21st Century: A Comprehensive Guide to Conventional and Alternative Sources.

Chapter 8 ..........................Nuclear and Hydropower

• Discuss the advantages of nuclear power generation.

• Be familiar with the different types of nuclear reactor design, their application and the advantages/

disadvantages of each.

• Be familiar with the general power outputs of different types of power plants, understand how nuclear and

hydropower fit the power supply grid.

• Discuss the advantages and disadvantages of hydropower.

• List the nations with the greatest reliance on hydropower.

David Schlissel and Bruce Biewald. Nuclear Power Plant Construction Costs.

• Know the factors that go into estimating the construction costs for a new nuclear power plant.

• Understand how rising construction costs will impact the viability of future reactor projects.

• Understand the difficulties in estimating project costs for new nuclear reactor designs.

Peter Coy. The Prospect for Safe Nuclear (Bloomberg Businessweek, March 24, 2011).

• Understand the concept of “passive” safety features.

• Be familiar with the types of safer, next-generation reactors.

• Understand why there is resistance to adopting safer nuclear reactor designs.

• Know the risk management decisions that led to the failure of Tepco’s Fukushima reactor.

2.3 Fundamentals of Electricity Distribution and Trading

1. Sally Hunt. Making Competition Work in Electricity (New York: John Wiley & Sons, Inc., 2002).

• Chapter 7.......................Trading Arrangements

• Chapter 8.......................Details of the Integrated Trading Model


• Chapter 4.3 ...................Tolling Agreements

• Chapter 4.4...................Wheeling Power



AIMS:Sally Hunt. Making Competition Work in Electricity.

Chapter 7...........................Trading Arrangements

• Understand the physical attributes (i.e. lack of storage) that make electricity different from other energy commodities.

• Know the “four pillars” of electricity market design.

• Know the characteristics of the three models of trading agreements: wheeling, decentralized and integrated.

• Explain how a merit order pricing curve works.

• Know how locational prices are set.

• Explain how congestion affects electricity pricing models and how it can be managed.

• Be able to define ancillary services in the electricity market.

Chapter 8 ..........................Details of the Integrated Trading Model

• Discuss how supply and demand fundamentals work to set the spot price.

• Contrast “demand bidding,” “capacity payments,” and “capacity obligations.”

• Describe the impact of “demand response.”

• Understand the role forward contracts play in risk management.

• Define congestion management and calculate congestion costs.

• Discuss how day-ahead markets operate and how contracts are scheduled in the PJM market.

Davis W. Edwards. Energy Trading and Investing.

Chapter 4.3 .......................Tolling Agreements

• Explain the market role of a “power marketer.”

• Be able to perform a net profit calculation.

• Explain the risk management exposure of a tolling agreement.

• Define the “dispatch rate” and its application.

Chapter 4.4.......................Wheeling Power

• Give examples of the various types of wheeling trades.

• Understand the nature of electricity and how it flows over a network and what this means for market trading

opportunities.

• What are the specific technical issues associated with the long-distance transmission of electricity.

• Compare spread trades to wheeling trades.

2.4 Load Forecasting


• Chapter 4.1 ....................Spatial Load Forecasting


Chapter 4.1 ........................Spatial Load Forecasting

• Know the factors that go into producing a load forecast.

• Define “base load power” and understand its relevance to market and dispatch decisions.

• Understand the relationship between weather and electricity consumption.

• Know the steps in creating and testing a load forecasting model.



RENEWABLE ENERGY—Exam Weight | 10%

• Economics, Financing and Investment in Renewable Energy

• Sustainable Energy and Biofuels

• Current Trends in the Carbon Market

• Emissions Trading Models in the European Union

Renewables, Trends in the Carbon Market and Emissions Trading

3.1 Economics and Financing of Global Investment in Renewable Energy

1. Geoffrey Heal. The Economics of Renewable Energy.

2. Chris Grobey, John Pierce, Michael Faber and Greg Broome. Project Finance Primer for Renewable Energy

and Clean Tech Projects.

3. Bloomberg New Energy Finance. Global Trends in Renewable Energy Investment.

AIMS:Geoffrey Heal. The Economics of Renewable Energy.

• Understand the capital intensive nature of renewable energy projects and the economic impact relative to

fossil fuel based projects.

• Discuss the “social cost” of using fossil fuels.

• Know the four parameters against which investments in renewable projects are judged.

• Be able to calculate the “capacity factor” for a wind or solar plant when given a set of parameters.

• Understand how the price of carbon affects the cost of electricity.

• Know the relative viability of each major source of renewable power (i.e. wind, solar, etc).

• Understand the disadvantages wind and solar power plants have when bidding into day-ahead electricity

markets.

• Be able to estimate the basic costs associated with a renewable project.

Chris Grobey, John Pierce, Michael Faber and Greg Broome. Project Finance Primer for Renewable Energy and

Clean Tech Projects.

• Know the primary stakeholders in a project finance agreement.

• Understand the financial conditions under which it would be advantageous to enter into a project finance

agreement.

• Know how a typical project finance agreement is structured.

• Understand how projects are financed and how revenues are distributed to investors (i.e. the project

“waterfall”).

• Be able to explain the tax structures used to monetize available project subsidies.



Bloomberg New Energy Finance. Global Trends in Renewable Energy Investment.

• Be familiar with investment trends in renewable energy in both developed and developing nations.

• Be aware of the challenges faced by investors in renewable energy projects.

• Know the relative global distribution of power supplied by renewable sources in 2010.

• Be familiar with the relative allocation of investment capital provided by private equity and venture capital

sources for renewable projects.

• Explain how asset finance drives investment in the renewable sector.

3.2 Sustainable Energy and Biofuels

1. Roy L. Nersesian. Energy for the 21st Century: A Comprehensive Guide to Conventional and Alternative Sources

(Armonk, NY: M.E. Sharpe, Inc., 2007).

• Chapter 9.......................Sustainable Energy

2. Govinda Timilsina and Ashish Shrestha. Biofuels: Markets, Targets and Impacts (The World Bank, July 2010).

• Sections 1 through 5

AIMS:Roy L. Nersesian. Energy for the 21st Century: A Comprehensive Guide to Conventional and Alternative Sources.

Chapter 9 ..........................Sustainable Energy

• Compare sources of conventional energy and sustainable energy.

• Know the major types of sustainable energy: geothermal, wind, solar, tidal.

• Understand how technical limitations can impact the commercial viability of sustainable energy projects.

• Explain how financial incentives impact renewable (sustainable) energy.

• Discuss the relationship between sustainable energy and economic development.

Govinda Timilsina and Ashish Shrestha. Biofuels: Markets, Targets and Impacts.

• Know the difference between first and second-generation biofuels.

• Know which countries are the leading producers of ethanol and other biofuels.

• Understand the current and likely future drivers of the international trade in biofuels.

• Be familiar with the current costs in biofuel production and the countries with the largest investments in

biofuel production plants.

3.3 Current Trends in the Carbon Market

1. State and Trends of the Carbon Market (The World Bank, 2011).

• Section 2........................Domestic Policy Developments—A Story of Fragmentation

• Section 3........................How Market Participants Transact—Risk and Regulation

• Section 4........................Carbon and Climate Finance



AIMS:The World Bank. State and Trends of the Carbon Market.

Section 2 ...........................Domestic Policy Developments—A Story of Fragmentation

• Be familiar with the carbon-reduction targets set out in the European Union’s roadmap for 2050.

• Be familiar with the controversy surrounding the addition of aviation emissions to the EU’s Emissions Trading

Scheme (ETS).

• Understand how the state of California influences environmental policy in the United States.

• Understand the market challenges faced by California in establishing their own emissions cap-and-trade system.

• Explain the process for linking different ETS markets.

• Be familiar with national plans to reduce emissions in countries like Australia and China.

Section 3 ...........................How Market Participants Transact—Risk and Regulation

• Know the status of active regulations affecting the carbon markets.

• Understand the issues surrounding OTC emissions trading.

• Understand the issues facing the future of Clean Development Mechanism (CDM) and Joint Implementation

(JI) emissions reduction schemes.

Section 4 ...........................Carbon and Climate Finance

• Be familiar with the issues facing the Kyoto Protocols after 2012.

• Know the role of voluntary markets in reducing greenhouse gas emissions.

• Understand the role of the Climate Investment Fund (CIF) and other similar mechanisms.

• Understand how the Reducing Emissions from Deforestation and Forest Degradation (REDD) program works.

3.4 Emissions Trading Models in the European Union

1. Frank Fabozzi (ed.): The Handbook of Commodity Investing (Hoboken, NJ: John Wiley & Sons, 2008).

• Chapter 37.....................Emissions Trading in the European Union

AIMS:Frank Fabozzi (ed.). The Handbook of Commodity Investing.

Chapter 37 ........................Emissions Trading in the European Union

• Understand how emissions allowances are designed to reduce greenhouse gas emissions.

• Know how emissions allowances are traded, the difference between products traded via exchanges and

over-the-counter, and how those products are used.

• Explain the price formation mechanics in the emissions allowance market.

• Know the difference between spot and future prices in the European emissions market.



FINANCIAL PRODUCTS—Exam Weight | 20%

• Forward Contracts and Exchange Traded Futures

• Energy Swaps

• Energy Options

• Exotic Options

• Option Valuation and Risk Management

• Real Option Valuation

• Speculation and Spread Trading in Energy Commodities

• Hedging Energy Commodity Risks

• Weather Derivatives

Financial Products, Trading, Hedging and Valuation

4.1 Forward Contracts and Exchange Traded Futures

1. Steven Errera and Stewart L. Brown. Fundamentals of Trading Energy Futures & Options, 2nd Edition


• Chapter 3.......................Behavior of Commodity Futures Prices

2. Robert McDonald. Derivatives Markets, 2nd Edition (Boston: Pearson Education, Inc., 2006).

• Chapter 6.......................Commodity Forwards and Futures

AIMS:Steven Errera and Stewart L. Brown. Fundamentals of Trading Energy Futures & Options, 2nd Edition.

Chapter 3 ..........................Behavior of Commodity Futures Prices

• Discuss the concept of “full carry.”

• Explain “backwardation” and “contango” and their affect on futures prices.

• Explain “cash management” arbitrage, calculate an example of “cash/futures” arbitrage.

• Understand the concept of “basis” and calculate an example of its application.

Robert McDonald. Derivatives Markets.

Chapter 6 ..........................Commodity Forwards and Futures

• Describe how to create a synthetic commodity position and use it to explain the relationship between the

forward price and the expected future spot price.

• Explain the effect non-storability has on electricity prices.

• Derive the basic equilibrium formula for pricing commodity forwards and futures.

• Describe an arbitrage transaction in commodity forwards and futures, compute the potential arbitrage profit.

• Explain the impact storage costs and convenience yields have on commodity forward pricing and no-arbitrage

bounds.

• Compute the forward price of a commodity, including storage costs.

• Compare the lease rate with the convenience yield.

• Explain how basis risk can occur when hedging commodity price exposure.



4.2 Energy Swaps

1. Vincent Kaminski (ed). Managing Energy Price Risk (London: Risk Books, 2004).

• Chapter 1 ........................Energy Swaps

AIMS:Vincent Kaminski (ed). Managing Energy Price Risk.

Chapter 1 ...........................Energy Swaps

• Understand how the value of swap positions are impacted by changes in the value of underlying prices.

• Understand and calculate the profit and payoff profiles for “plain vanilla” options.

• Describe the pricing and profit/loss positions of different kinds of swaps (differential, participation, etc).

• Discuss the major users of swaps and their motivations in project financing and risk mitigation.

• Understand issues surrounding liquidity and their impact on market transactions.

• Know the benefits and risks for end users engaged in swap transactions.

4.3 Energy Options


• Chapter 2.......................Energy Options


Chapter 2...........................Energy Options

• Know the fundamental difference between call and put options.

• Explain the relationship between options and swaps.

• Understand the factors that impact option valuation.

• Understand the fundamental differences between European, American, and Asian options and their exercise.

• Define and discuss the application of the “Greeks.”

• Work through an example of delta hedging.

• Contrast standard options, participation collars and participating swaps, bull and bear spreads, and swaptions;

know how each are used for risk management purposes.

4.4 Exotic Options


• Chapter 3.......................Energy Exotic Options




Chapter 3 ..........................Energy Exotic Options

• Define and differentiate exotic options from plain vanilla options.

• Understand the payoff profile for different types of exotic options.

• Differentiate option valuation methods: Monte Carlo (simulation), tree (bi-multinomial), finite-difference/

numerical integration.

• Discuss how commodity prices differ from stock prices and how energy commodities are different from other

types of market-traded commodities.

• Calculate an option premium using a binomial tree.

• Discuss the following option structures and situations in which they would be used: Asian, barrier, lookback,

spread, exchange, basket, compound, digital.

• Calculate a spark spread.

4.5 Option Valuation and Risk Management

1. Dragana Pilipovic. Energy Risk: Valuing and Managing Energy Derivatives, 2nd Edition (New York:

McGraw Hill, 2007).

• Chapter 9.......................Overview of Option Pricing for Energies

• Chapter 10.....................Option Valuation

2. Les Clewlow and Chris Strickland. Energy Derivatives: Pricing and Risk Management (London: Lacima

Publications, 2000).

• Chapter 9.......................Risk Management of Energy Derivatives

AIMS:Dragana Pilipovic. Energy Risk: Valuing and Managing Energy Derivatives, 2nd Edition.

Chapter 9 ..........................Overview of Option Pricing for Energies

• Be able to calculate parity value.

• Be familiar with the key differences between the valuation of American, Asian and European options.

• Know how the behavior of an underlying commodity will affect option pricing.

• Understand the techniques used to price options (i.e. closed-form solutions, trees, simulations).

• Understand how pricing models are chosen and tested for validity.

Chapter 10.........................Option Valuation

• Discuss the strengths and weaknesses of closed-form models in option valuation.

• Understand how and why approximations are used with closed-form models.

• Understand what a “volatility smile” is and how it is applied.

• Be able to use a binomial or trinomial tree to value an option.

• Understand how options are specifically used to model energy commodities.



Les Clewlow and Chris Strickland. Energy Derivatives: Pricing and Risk Management.

Chapter 9 ..........................Risk Management of Energy Derivatives

• Explain the impact of price changes in the underlying asset on delta hedge effectiveness.

• Understand why the value of a portfolio does not change if properly hedged.

• Understand the relationship between delta, gamma, and vega and the expected impact on each given a set

of market assumptions.

• Calculate the necessary hedge for various long or short option positions.

• Be familiar with the impact of volatility on portfolio performance and discuss how to hedge volatility risk.

4.6 Real Option Valuation

1. Alexander Triantis. Handbook of Modern Finance (New York: Research Institute of America, 2003).

• Chapter 7...........................Real Option Valuation

2. William Bailey, Benoit Couet, Ashish Bhandari, Soussan Faiz, Sunaram Srinivasan and Helen Weeds. Unlocking the

Value of Real Options (Oilfield Review Winter 2003/2004).

AIMS:Alexander Triantis. Handbook of Modern Finance.

Chapter 7...........................Real Option Valuation

• Define “real options.”

• Understand the benefits and problems in using real option valuation.

• Explain the challenges of estimating expected cash flows and discount rates.

• Know the different types of real options, including: growth, contraction, switching and contractual options.

• Understand the four techniques used to value real options.

• Explain how real options are used by a company’s management to make financial and operational decisions.

William Bailey, Benoit Couet, Ashish Bhandari, Soussan Faiz, Sunaram Srinivasan and Helen Weeds.

Unlocking the Value of Real Options.

• Know the terms: Net Present Valuation (NPV), Decision Trees and Real Options.

• Understand the application of Discounted Cash Flows.

• Explain how NPV is used to make investment decisions in a gas/oil field.

• Explain how oil companies specifically use real option valuation.

• Understand how a binomial lattice is used for valuation of an asset or option.

• Discuss the different types of real options and the circumstances in which they would be used.

4.7 Speculation and Spread Trading in Energy Commodities

1. Steven Errera and Stewart L. Brown. Fundamentals of Trading Energy Futures & Options, 2nd Edition


• Chapter 4 ..........................Speculation and Spread Trading



AIMS:Steven Errera and Stewart L. Brown. Fundamentals of Trading Energy Futures & Options, 2nd Edition.

Chapter 4 ..........................Speculation and Spread Trading

• Explain the beneficial role speculation plays in establishing derivative prices.

• Calculate the position a trader would take if the spread on two commodities is considered too wide or

too narrow.

• Understand the concept of intermarket spreads and their application.

• Discuss the role of the “crack spread” in trading commodities, explain why a trader would take a particular

position in a crack spread.

• Be familiar with the spark spread, its derivation and its applications.

4.8 Hedging Energy Commodity Risks

1. Peter C. Beutel. Surviving Energy Prices (Tulsa, OK: PennWell Books, 2005).

• Chapter 3...........................Different Kinds of Risk

2. Tom James. Energy Markets: Price Risk Management and Trading (Singapore: John Wiley & Sons, 2008).

• Chapter 13.........................Energy-Market Hedging Scenarios

3. Steve Leppard. Energy Risk Management: A Non-technical Introduction to Energy Derivatives (London:

Risk Books, 2005).

• Chapter 4 ..........................Physical Transactions and Basic Hedging Instruments

AIMS:Peter C. Beutel. Surviving Energy Prices.

Chapter 3 ..........................Different Kinds of Risk

• Define the following : Price Risk, Basis Risk, Supply Risk, Volume Risk.

• Provide examples of each type of risk and strategies for mitigating them.

• Know the difference between “prompt delivery” and “any time delivery” and the risk associated with each.

• Understand how to hedge a customer contract using puts, calls, or futures.

Tom James. Energy Markets: Price Risk Management and Trading.

Chapter 13 .........................Energy-Market Hedging Scenarios

• Compare the use of a fixed-price swap with a collar structure for end-use hedging.

• Know the unique contract specifications related to each energy commodity (crude, oil, coal, power, etc.).

• Calculate the settlement for both a monthly fixed-price swap and a collar structure.

• Know the various methods for settling a swap contract.

• Understand the challenges faced by an electric power generator when hedging in the coal and natural

gas markets.

• Understand how and why a manufacturer would choose to hedge their energy costs.

• Compare and contrast the various hedging strategies used to mitigate risk in long and short energy

market positions.

• Be able to perform a simple hedge transaction for a hypothetical refinery.



Steve Leppard. Energy Risk Management: A Non-technical Introduction to Energy Derivatives.

Chapter 4 ..........................Physical Transactions and Basic Hedging Instruments

• Explain the roles and various risk exposures confronted by “producers,” “transformers,” and “off-takers.”

• Know the payout profiles for both the producers and off-takers in a swap transaction.

• Calculate the mark-to-market value of a swap at inception and at various future dates assuming dynamic

spot prices.

• Understand the risks associated with a swap transaction.

• Calculate the cash and physical commodity flows for various types of swap structures.

• Know how a futures position is closed out; know how a forward position is closed out, and the differences

between futures and forwards.

• Discuss fixed-for-floating swaps, the reasons for their use and how they are settled.

• Be familiar with other types of specialized swaps (quanto, indexation, etc.).

4.9 Weather Derivatives

1. Geoffrey Considine, Ph.D. Introduction to Weather Derivatives.

2. Kevin Baumert and Mindy Selman. Data Note: Heating and Cooling Degree Days. (World Resources Institute, 2003).

AIMS:Geoffrey Considine, Ph.D.,. Introduction to Weather Derivatives.

• Know what is meant by the term weather risk and how weather risk is hedged, particularly through the use of

options and swaps.

• Understand the methodology used for pricing weather derivatives; know how weather derivatives are traded.

• Explain how inputs are obtained for weather derivative pricing models.

Kevin Baumert and Mindy Selman. Data Note: Heating and Cooling Degree Days.

• Know the terms “heating degree days” (HDD) and “cooling degree days” (CDD).

• Understand how both HDDs and CDDs are calculated using a baseline temperature.

MODELING ENERGY PRICES—Exam Weight | 10%

• Introduction to Energy Modeling

• Data Analysis and Essential Statistics

• Spot Price Behavior

• Forward Curve Modeling

• Estimating Price Volatility



Modeling Techniques for Energy Commodities

5.1 Introduction to Energy Modeling


McGraw Hill, 2007).

• Chapter 2.......................What Makes Energies So Different?


Chapter 2...........................What Makes Energies So Different?

• Discuss why energy products are harder to model than financial products.

• Describe the specific impact of supply and demand drivers on energy prices.

• State why regulation, illiquidity, and decentralized markets make energies different from financials in terms of

price discovery and modeling complexity.

• Provide an example of basis risk for energies.

5.2 Data Analysis and Essential Statistics


McGraw Hill, 2007).

• Chapter 4.......................Essential Statistical Tools


Chapter 4 ..........................Essential Statistical Tools

• Explain the importance of and tools used in time series analysis, distribution analysis.

• Discuss the “moments” and why they are important in analyzing data.

• Discuss and contrast normal and lognormal distributions.

• Explain the use of the Q-Q plot, the autocorrelation test, mean-squared and R-squared error.

• Understand the role statistics play in price discovery in the energy markets.

5.3 Spot Price Behavior



• Chapter 2.......................Understanding and Analyzing Spot Prices


McGraw Hill, 2007).

• Chapter 5.......................Spot Price Behavior



AIMS:Les Clewlow and Chris Strickland. Energy Derivatives: Pricing and Risk Management.

Chapter 2...........................Understanding and Analyzing Spot Prices

• Understand how mean reversion affects energy prices.

• Work through an example of a mean reverting spot price.

• Understand how stochastic volatility can be simulated.

• Explain how energy prices can experience “jumps” and how price jumps can be simulated.

• Understand how and why seasonality would be included in energy spot price estimation.

Dragana Pilipovic. Energy Risk: Valuing and Managing Energy Derivatives, 2nd Edition.

Chapter 5 ..........................Spot Price Behavior

• Describe the difference between single-factor and mean-reverting models.

• Understand the role of volatility in single-factor models.

• Understand the Black-equivalent volatility and its application relative to spot-price behavior

• Calibrate parameters using time series analysis.

5.4 Forward Curve Modeling



• Chapter 4.......................Energy Forward Curves

• Chapter 8.......................Forward Model Curves

2. Helyette Geman (ed). Risk Management in Commodity Markets: From Shipping to Agriculturals and Energy

(West Sussex, England: John Wiley & Sons, 2008).

• Chapter 2.......................Forward Curve Modeling in Commodity Markets


Chapter 4 ..........................Energy Forward Curves

• Describe the specific challenges of building a forward curve in the energy market.

• Understand and give an example of the “cost of carry” relationship.

• Understand the relationship between seasonality and contango/backwardation in forward curves in

energy markets.

• Explain why forward curves are different for the electricity market; know the different approaches to

modeling pricing data.

• Illustrate how the heat rate is used to set electricity prices.



Chapter 8 ..........................Forward Model Curves

• Derive a simple forward price curve.

• Understand how volatility affects forward curve models.

• Understand principal component analysis (PCA).

• Understand how risk factors “shift”, “tilt” or “bend” the price curve.

• Know the general multi-factor model for the forward curve.

• Explain the relationship between forward curve and spot price models.

• Understand how seasonality is factored into forward curves.

• Give pricing examples for European and exotic options.

• Be familiar with calendar options.

• Understand the use of implied estimation of volatility functions.

Helyette Geman (ed). Risk Management in Commodity Markets: From Shipping to Agriculturals and Energy.

Chapter 2...........................Forward Curve Modeling in Commodity Markets

• Discuss the factors that cause the shape of a commodity forward curve.

• Contrast the forward curve for seasonal and non-seasonal commodities.

• State the purpose of Principal Components Analysis (PCA).

• Provide an interpretation of a change in level, slope, and curvature in a PCA.

5.5 Estimating Price Volatility



• Chapter 3.......................Volatility Estimation in Energy Markets


McGraw Hill, 2007).

• Chapter 8.......................Volatilities


Chapter 3 ..........................Volatility Estimation in Energy Markets

• Discuss the shortfalls of Geometric Brownian Motion (GBM) when used to forecast commodity prices.

• Calculate volatility from historical data and understand the advantages of natural logs.

• Calculate the scaling of volatility from daily to annual or from annual to daily terms.

• Understand how volatility for a mean-reverting process is different than volatility for a non-mean-reverting

process.

• Be familiar with the terms homoskedastic, heteroskedastic, leptokurtic, ARCH and GARCH, and their application.



Dragana Pilipovic. Energy Risk: Valuing and Managing Energy Derivatives, 2nd Edition.

Chapter 8 ..........................Volatilities

• Know the different measures of randomness and how they relate to volatility.

• Understand how option implied volatilities are derived and applied in practice.

• Calculate an average longer-term volatility from information provided by shorter-term volatilities.

• Calculate market-implied volatilities for one option or a series of options.

• Understand the volatility smile and how it is derived.

• Discuss the relationship between volatility and time-to-delivery for forward contracts assuming the use of a

single-factor mean-reverting model.

RISK MANAGEMENT FUNDAMENTALS—Exam Weight | 15%

• Value-at-Risk (VaR) and Stress Testing

• Credit and Counterparty Risk Management

• Enterprise Risk Management

• Case Studies in Risk Management Failure

Risk Management Fundamentals

6.1 Value-at-Risk (VaR) and Stress Testing



• Chapter 10.....................Value-at-Risk

2. Markus Burger, Bernhard Graeber, and Gero Schindlmayr. Managing Energy Risk: An Integrated View on Power

and Other Energy Markets (West Sussex, England: John Wiley & Sons, 2007).

• Chapter 6.2 ...................Value-at-Risk and Further Risk Measures

3. Alessandro Mauro. “Price Risk Management in the Energy Industry: The Value at Risk Approach,” Proceedings

of the XXII Annual International Conference of the International Association for Energy Economics

(June 9-12, 1999).

4. Jose Ramon Aragones, Carlos Blanco, and Kevin Dowd. Incorporating Stress Tests Into Market Risk Modeling.


Chapter 10.........................Value-at-Risk

• Define Value-at-Risk (VaR).

• Know the limitations of VaR as a risk management tool and how VaR is calculated for different confidence levels.

• Explain how standard deviations are accounted for within VaR calculations.

• Describe the four main methodologies for calculating VaR: Delta, Delta-Gamma, Historical and Monte Carlo

simulations.

• Understand how each method listed above is used to calculate VaR given a set of inputs.



Markus Burger, Bernhard Graeber, and Gero Schindlmayr. Managing Energy Risk: An Integrated View on Power

and Other Energy Markets.

Chapter 6.2 .......................Value-at-Risk and Further Risk Measures

• Calculate volatility and correlation required for analytic method of VaR measurement.

• Understand the role of backtesting in relation to VaR models.

• Compare and contrast cashflow-at-risk, earnings-at-risk, and profit-at-risk.

Alessandro Mauro. “Price Risk Management in the Energy Industry: The Value at Risk Approach,” Proceedings

of the XXII Annual International Conference of the International Association for Energy Economics

(June 9-12, 1999).

• Calculate VaR for a single asset and for a portfolio of assets.

• Use VaR to understand the potential maximum downside risk for different commodity positions.

• Understand conditions in various commodity markets that lead to logical use of VaR as a risk measure.

Jose Ramon Aragones, Carlos Blanco, and Kevin Dowd. Incorporating Stress Tests Into Market Risk Modeling.

• Know why an organization would engage in a stress testing; understand how a stress test would be used in

conjunction with Value-at-Risk models.

• Identify the three main types of stress tests.

• Explain how stress testing would be incorporated into an organization’s overall risk management strategy.

• Discuss the shortcomings of stress testing.

6.2 Credit and Counterparty Risk Management


• Chapter 16 .....................A Practical Guide to Credit Control and Risk-Mitigation Methods

2. Markus Burger, Bernhard Graeber, and Gero Schindlmayr. Managing Energy Risk: An Integrated View on Power

and Other Energy Markets (West Sussex, England: John Wiley & Sons, 2007).

• Chapter 6.3 ...................Risk Management (Credit Risk)

3. Jon Gregory. Counterparty Credit Risk (West Sussex, England: John Wiley & Sons, 2010).

• Chapter 2.......................Defining Counterparty Credit Risk

• Chapter 3.......................Mitigating Counterparty Credit Risk

4. Craig Pirrong. The Economics of Central Counterparty Clearing: Theory and Practice. (ISDA Working Paper).

AIMS:Tom James. Energy Markets: Price Risk Management and Trading.

Chapter 16.........................A Practical Guide to Credit Control and Risk-Mitigation Methods

• Describe the common methods for managing credit-risk exposure.

• Explain the use of “collateralization.”

• Explain the use of credit default swaps (CDS) as a risk management tool, and understand the limitations of

using CDS.

• Discuss how a clearing house can be used to mitigate credit risk between counterparties.



Markus Burger, Bernhard Graeber, and Gero Schindlmayr. Managing Energy Risk: An Integrated View on Power

and Other Energy Markets.

Chapter 6.3 .......................Risk Management (Credit Risk)

• Describe methods of quantifying credit risk and methods for reducing credit risk.

• Explain external credit ratings and related default probabilities.

• Discuss internal rating factors, including how and why they are applied to a transaction.

• Understand settlement risk and replacement risk and how each is calculated.

Jon Gregory. Counterparty Credit Risk.

Chapter 2...........................Defining Counterparty Credit Risk

• Define “counterparty risk.”

• Know the difference between counterparty risk and credit/lending risk.

• Understand the mark-to-market mechanism, its effect on the worth of a portfolio or contract, and its impact

on counterparty credit exposure.

• Know the techniques for quantifying counterparty risk.

• Understand the metrics for measuring credit exposure.

• Know the difference between Expected Exposure (EE) and Potential Future Exposure (PFE).

Chapter 3 ..........................Mitigating Counterparty Credit Risk

• Know the five methods outlined to mitigate credit risk.

• Understand what a Special Purpose Vehicle (SPV) is and how it is used to manage financial risk.

• Know how and when termination events may be employed.

• Understand the relationship between netting and close-out.

• Give an example of how netting can reduce overall exposure for a given position.

• Understand the affect of a negative mark-to-market position on a netting agreement.

• Know how collateral is typically used in market activity.

Craig Pirrong. The Economics of Central Counterparty Clearing: Theory and Practice.

• Understand the basic role of a Central Counterparty (CCP) in clearing financial transactions.

• Define the terms: netting, collateralization, insurance, equity, and mutualization.

• Explain how a CCP intervenes in the case of a default, particularly how netting is employed in such a circumstance.

• Understand the potential risk management exposures for a counterparty.

• Know how a product or transaction is judged for its ability to be cleared through a CCP.

• Explain the structure and operation of a CCP.

• Understand the potential impact CCPs have on systemic market risk.

6.3 Enterprise Risk Management

1. Casualty Actuarial Society, Enterprise Risk Management Committee. Overview of Enterprise Risk Management.


• Chapter 10.....................Management Controls

• Chapter 15 .....................Operational Risk and its Management



AIMS:Casualty Actuarial Society, Enterprise Risk Management Committee. Overview of Enterprise Risk Management.

• Define Enterprise Risk Management (ERM).

• Know the steps in the ERM framework.

• Discuss the metrics for measuring risk within the ERM risk profile.

• Be familiar with the cited case studies, understand how they illustrate different approaches to ERM.

• Be familiar with the methods used for modeling risk within ERM.

Tom James. Energy Markets: Price Risk Management and Trading.

Chapter 10......................... Management Controls

• Understand the five broad categories of typical control breakdowns.

• Describe the key components in developing a risk management or trading policy.

• Discuss the key contents of a risk policy document.

• Describe the role of a back-office system; understand the role of both external and internal auditors.

Chapter 15 .........................Operational Risk and its Management

• Describe a typical derivatives transaction.

• List and discuss the five steps for assessing and controlling risk.

• Understand the differences between: risk reduction, risk control, risk containment and risk transfer.

6.4 Case Studies in Risk Management Failure

1. Ludwig Chincarini. A Case Study on Risk Management: Lessons from the Collapse of Amaranth Advisors L.L.C.

2. Connecticut Law Review. Risk Management and Corporate Governance: The Case of Enron.

AIMS:Ludwig Chincarini. A Case Study on Risk Management: Lessons from the Collapse of Amaranth Advisors L.L.C.

• Be familiar with the reasons for the collapse of Amaranth Advisors LLC.

• Understand the mechanics of Amaranth’s long winter/short non-winter strategy in relation to the natural gas

futures market.

• Explain the different types of risk exposure Amaranth faced with their hedging strategy.

• Know the role that assumptions ultimately played in the failure of Amaranth’s hedging strategy.

Connecticut Law Review. Risk Management and Corporate Governance: The Case for Enron.

• Cite the reasons why the Board of Directors was blamed for the collapse of Enron.

• Understand how these failures are symptomatic of general problems often encountered with Board-level

governance of risk management techniques.

• Know the role of accountability in mitigating risk.



CURRENT ISSUES IN ENERGY—Exam Weight | 10%

NOTE ON THE CURRENT ISSUES IN ENERGY SECTION: GARP recognizes that energy markets are dynamic and are often affected

by regulation, newly discovered reserves, technological breakthroughs and current supply and demand trends. Global energy risk

managers must remain abreast of these developments to effectively manage risk in their businesses. The “Current Issues” section is

designed to familiarize ERP candidates with new developments and issues that are likely to have a long-term impact on the global

energy markets. Topics included in the “Current Issues” section of the 2012 ERP Examination include how Chinese coal imports impact

the global market, the effect of CFTC position limit rules and new proposed European financial regulations on the commodity markets,

risk management lessons learned from the BP Deepwater Horizon spill, and how oil scarcity could impact future markets. The infor-

mation contained within each reading is current as of November 15, 2011 and candidates can expect to be tested on these readings

throughout 2012. Subsequent developments in these topics, or any new areas of focus, will be captured on the 2013 ERP Examination.

Readings for Current Issues in Energy

1. NERA Economic Consulting. “Lessons from the BP Deepwater Horizon Oil Spill” (September 2010).

2. Skadden, Arps, Slate, Meagher & Flom LLP and Affiliates. “CFTC Adopts Final Position Limit Rules at October 18

Open Meeting.”

3. Mark A. Cohen, Madeline Gottlieb, Joshua Linn, and Nathan Richardson. “Deepwater Drilling: Law, Policy and

Economics of Firm Organization and Safety.”

4. Richard Morse and Gang He. “The World's Greatest Coal Arbitrage: China's Coal Import Behavior and

Implications for the Global Coal Market.”

5. Ivan Diaz-Rainey, Mathias Siems and John Ashton. “The Financial Regulation of European Wholesale Energy and

Environmental Markets.”

6. International Monetary Fund. “Oil Scarcity, Growth and Global Imbalances.”

AIMS:NERA Economic Consulting. “Lessons from the BP Deepwater Horizon Oil Spill.”

• Know the four categories of risk that can impact a large firm.

• Understand the Bayesian approach to risk assessment.

• Understand how and why BP failed to adequately manage their strategic risk and how this contributed to the

Deepwater Horizon event.

• Discuss the problems an organization may have in effectively communicating risk internally.

Skadden. “CFTC Adopts Final Position Limit Rules at October 18 Open Meeting.”

• Understand how the limits to speculative trading positions adopted by the CFTC will impact the energy markets.

• Know the specific limits for energy commodity contracts set by the CFTC.

• Know the specific limits for natural gas contracts set by the CFTC, and how this differs from contract limits for

other commodities.



Mark A. Cohen, Madeline Gottlieb, Joshua Linn, and Nathan Richardson. “Deepwater Drilling: Law, Policy and

Economics of Firm Organization and Safety.”

• Understand the theory of a “safety culture” and what constitutes a “high reliability organization.”

• Be able to explain how having a strong or weak safety culture can impact an organization’s ability to deal with

hazard risk.

• Identify the policies and/or procedures common to organizations identified as having a strong safety culture.

• Discuss the internal conflicts within an organization that can undermine operational risk management.

• Know the external policies that can affect an organization’s safety culture.

Richard Morse and Gang He. “The World's Greatest Coal Arbitrage: China's Coal Import Behavior and

Implications for the Global Coal Market.”

• Understand the basics of the Chinese coal market: domestic reserves vs. domestic demand.

• Explain the arbitrage opportunities available to coal buyers in southern China.

• Know the role freight costs play in setting coal market prices.

• Explain how Chinese arbitrage has impacted prices on the global coal market.

Ivan Diaz-Rainey, Mathias Siems and John Ashton. “The Financial Regulation of European Wholesale Energy

and Environmental Markets.”

• Be familiar with the regulatory bodies overseeing the operation of the European energy markets.

• Understand the legal arguments in favor of increased regulation of the European markets.

• Identify the key financial risks posed by the energy and environmental markets.

• Be familiar with the proposed regulations contained within the “Energy Policy for Europe” and the possible

impact they will have on the energy markets.

International Monetary Fund. “Oil Scarcity, Growth and Global Imbalances.”

• Understand the definition of oil scarcity and its impact.

• Understand global supply and demand trends and how they lead to oil scarcity.

• Discuss the relationship between oil consumption and the gross domestic product (GDP) growth of a country.

• Discuss the potential scenarios drawn from conditions of oil scarcity as discussed in the report.



NOTES

______________________________________________________________________________________________________________

______________________________________________________________________________________________________________

______________________________________________________________________________________________________________

______________________________________________________________________________________________________________

______________________________________________________________________________________________________________

______________________________________________________________________________________________________________

______________________________________________________________________________________________________________

______________________________________________________________________________________________________________

______________________________________________________________________________________________________________

______________________________________________________________________________________________________________

______________________________________________________________________________________________________________

______________________________________________________________________________________________________________

______________________________________________________________________________________________________________

______________________________________________________________________________________________________________

______________________________________________________________________________________________________________

______________________________________________________________________________________________________________

______________________________________________________________________________________________________________

______________________________________________________________________________________________________________

______________________________________________________________________________________________________________

______________________________________________________________________________________________________________

______________________________________________________________________________________________________________

2012 Energy Oversight Committee (EOC) Members

Ken Abbott ..................................Managing Director, Morgan Stanley & Company

Richard Apostolik .....................President and CEO, Global Association of Risk Professionals

Mark Galicia .................................Commercial Manager, BP North America, Inc.

Gordon E. Goodman ................Trading Control Officer, Occidental Petroleum Corporation

James Brown...............................Managing Director, Morgan Stanley & Company

Mark Jenner .................................Director, Credit Risk, BG Group

Jeff Jewell ....................................Chief Risk Officer, DTE Energy

Glenn Labhart, EOC Chair .....Partner, Labhart Risk Advisors, Inc.

Spyros Maragos ............................VP, Refined Products Analytics, Louis Dreyfus Energy Services, LP

Alessandro Mauro .....................Director of Risk Management, Litasco SA

Mark D. May ......................................Manager, Regional Risk Supply & Trading, Americas, ConocoPhillips

Jeff Parke .....................................Senior Director, Risk Management, Koch Industries, Inc.

Jonathan C. Stein ......................Chief Risk Officer, Vice President, Hess Corporation

Andrew D. Sunderman ............Managing Director, JP Morgan

Glen Swindle ...............................Managing Director, Energy Trade & Marketing, Credit Suisse

John Wengler .............................Director of Market Risk Controls, Hess Corporation

Creating a culture of risk awareness.TM

Global Association ofRisk Professionals

111 Town Square PlaceSuite 1215Jersey City, New Jersey 07310USA+ 1 201.719.7210

2nd FloorBengal Wing9A Devonshire SquareLondon, EC2M 4YNUK+ 44 (0) 20 7397 9630

www.garp.org

© 2012 Global Association of Risk Professionals. All rights reserved. 12-11

About GARP | The Global Association of Risk Professionals (GARP) is a not-for-profit global membership organization dedicated topreparing professionals and organizations to make better informed risk decisions. Membership represents over 150,000 risk manage-ment practitioners and researchers from banks, investment management firms, 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; certifications recognized by risk professionals worldwide. GARP also helps advance the role of riskmanagement via comprehensive professional education and training for professionals of all levels. www.garp.org.

erp_2012aimstatements

Documents

Transcript of erp_2012aimstatements