Erp Exam Questions Summary 4261x
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Practice questions summary This is a short summary of existing ERP practice questions (from the GARP ERP practice exam) that I found the most difficult and some of my own notes that I used to study for the ERP exam in 2010. In total, they are 78 questions. As in the Concept Checkers for the ERP exam, the format is question-answer to help you find the answer faster if you are pressed for time. I may offer a realistic practice exam and/or a practice webinar sometime soon in the future before the next ERP exam. If you are interested, please let me know via email. All the best for your ERP exam preparation! Alex Janis www.energyriskprofessional.com
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Determinant of cost in off-shore drilling. ______ For the development of an off-shore drilling project, the (blank) is the main determinant of cost. a. b. c. d.
basic engineering survey reservoir type cost associated with transporting equipment and bulk material water depth
Correct answer: d. Reason: The capital cost of developing an oil or gasfield may amount to several billion dollars. It is crucial that the key parameters are identified and evaluated so that the project can be properly defined and its viability assessed, because some of these parameters strongly influence the costs. Onshore, the nature of the terrain is the main determinant of costs. Offshore it is the water depth, which may be conventional (to 300 m), deep (to 1500 m) or ultra-deep (over 1500 m). A basic engineering survey represents about 2% of the technical costs of an off-shore drilling project, while transporting equipment and bulk material represents about 7.5% of the total cost. Reservoir parameters determine the number of wells required, and whether water or gas injection will be needed during the lifetime of the field.
Distinguish between the three types of water depth. ______ 1. Conventional (0 to 300 m) 2. Deep (300 to 1500 m) 3. Ultra-deep (over 1500 m)
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Effective price paid per barrel. ______ On July 20, Merg Refining knows it will need to purchase 20,000 barrels of crude in November. On NYMEX, oil futures contracts are traded for delivery every month. Thus, Merg decides to hedge using a mid-December contract. The futures price on July 20 is $60.00/bbl. On November 12, Merg is ready to purchase their needed crude and closes out its futures contract on that day; at this time the spot price is $62.00/bbl and the futures price is $61.10/bbl. In this scenario, the effective price paid per barrel is a. b. c. d.
$60.00 $60.90 $62.10 $62.90
Correct answer: b. Reason: The effective price paid (in dollars per barrel) is the final spot price less the gain on the futures, or 62.00 – 1.10 = 60.90. This can also be calculated as the initial futures price plus the final basis, 60.00 + 0.90 = 60.90. If Merg waited until expiration of the futures contract and took delivery, then the price paid would be $60.00, as gains on the futures perfectly offset the change in the spot.
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Price hedging. ______ […] risk in the natural gas market can be hedged with a […]. a. b. c. d.
Operational / futures contract Counter-party / plain vanilla swap Regulatory / letter of credit Market price / forward contract
Correct answer: d. Reason: If a forward contract is used to make or take delivery of the underlying commodity, then it has eliminated market risk by locking in the price of the physical commodity. A long forward contract can effectively be “closed out” by selling a contract for the same physical specification, location, volume and month before physical delivery commences; the mark-tomarket value of a forward contract tells us the value of doing so at the current market level.
Crude prices. ______ Given the following, simplified table of U.S. Gulf Coast refining margins at a given time, which is NOT true: Light Crude Medium Crude Heavy Crude
Crude Price $/bbl 21.00 20.00 15.00
Simple 0.10 (0.35) (3.16)
Refining Margins—$/bbl Complex Very Complex 0.30 0.35 0.65 1.52 3.60 4.60
a. Simple refineries break even more or less on light crude, but lose money handling heavier crudes. b. Medium crudes are profitable in complex refineries but not in simple ones. c. Complex refineries are highly profitable running heavy crude, but they may have difficulty competing for space against very complex refineries running the same crude. d. Heavy crude is too expensive and may have to come down in price to compete with medium and light crudes.
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Correct answer: d. Reason: All of the above are true except for number four. In fact, the light crude may be too expensive and may have to come down in price in order to compete with heavy crude.
Hedge effectiveness. ______ What measure of hedge effectiveness did FASB 133 recommend? a. b. c. d.
60/40 offset ratio 90/10 offset ratio “highly effective” offset ratio None of these
Correct answer: c. Reason: FASB has chosen to use a “highly effective” offset ratio as a measure of hedge effectiveness, rather than specifying a numeric ratio. If the fair value hedge is fully effective, the gain or loss on the hedging instrument, adjusted for the component, if any, of that gain or loss that is excluded from the assessment of effectiveness under the entity’s defined risk management strategy for that particular hedging relationship (as discussed in paragraph 63 in Section 2 of Appendix A), would exactly offset the loss or gain on the hedged item attributable to the hedged risk. Any difference that does arise would be the effect of hedge ineffectiveness, which consequently is recognized currently in earnings. The measurement of hedge ineffectiveness for a particular hedging relationship shall be consistent with the entity’s risk management strategy and the method of assessing hedge effectiveness that was documented at the inception of the hedging relationship, as discussed in paragraph 20(a). Nevertheless, the amount of hedge ineffectiveness recognized in earnings is based on the extent to which exact offset is not achieved. Although a hedging relationship must comply with an entity’s established policy range of what is considered “highly effective” pursuant to paragraph 20(b) in order for that relationship to qualify for hedge ing, that compliance does not assure zero ineffectiveness. Section 2 of Appendix A illustrates assessing hedge effectiveness and measuring hedge ineffectiveness. Any hedge ineffectiveness directly affects For more practice questions and information for the ERP exam, please go to www.energyriskprofessional.com
earnings because there will be no offsetting adjustment of a hedged item’s carrying amount for the ineffective aspect of the gain or loss on the related hedging instrument.
Default probability of bonds. ______ Taking into a snapshot from the table below, one can calculate that the probability of a B2 rated bond defaulting in the fourth year is (blank), and survive until the end of year three is (blank). Default probability in % Moody’s Rating Year 1 2 3 4 5 B1 4.680 8.3800 11.5800 13.8500 16.1200 B2 7.1600 11.6700 15.5500 18.1300 20.7100 B3 11.6200 16.6100 21.0300 24.0400 27.0500 Caa1 17.3816 23.2341 28.6386 32.4788 36.3137
a. b. c. d.
2.58%; 84.45% 4.28%; 78.97% 5.91%; 71.36% 7.54%; 65.30%
Correct answer: a. Reason: The unconditional default probability of a B2 rated bond in year four is calculated as 18.13 – 15.55 = 2.58%. The probability the bond will survive to end of year three is calculated as 100 – 15.55 = 84.45%. Each probability represents a cumulative default probability or the probability of default by that year.
Pipeline rates. ______ If the cost of shipping 1,000 bbl of crude from Tuscon, AZ to St. Louis, MO via truck is $25/bbl, and by rail is $21/bbl, all things being equal, an ideal charge on a pipeline with existing capacity to transport 1,000 bbl should be:
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a. b. c. d.
$21.00 - $25.00/bbl $19.50 - $21.00/bbl $24.50 - $25.00/bbl $20.00 - $21.50/bbl
Correct answer: b. Reason: The cost of alternative transportation method involves understanding the rates charged by the competing forms of transportation—ship, barge, rail, truck. The pipeline charge will be set equal to or slightly below those rates. Calculating rates using this method can be very favorable for the pipeline owner, especially for long-distance transportation. EOG Resources has paid as much as $25/bbl to ship crude by truck, but have switched to rail because this cost is just uneconomical (Reuters: March 12, 2009).
Single investments in the LNG chain. ______ Rank, in order of increasing costs, single investments of the liquefied natural gas chain. a. b. c. d.
Natural gas exploration; Receiving terminal; LNG ship; Liquefaction plant LNG ship; Natural gas exploration; Liquefaction plant; Receiving terminal Natural gas exploration; Liquefaction plant; LNG ship; Receiving terminal Receiving terminal; LNG ship; Natural gas exploration; Liquefaction plant
Correct answer: a. Reason: The heart of an LNG project and the largest single investment in the chain is the liquefaction plant.
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Coal-to-liquid production plants. ______ Development of coal-to-liquid production plants in the United States is risky because a. Technology to deal with concomitant carbon dioxide emissions have yet to be developed. b. Coal is a relatively scarce resource in the U.S. and would require major transportation infrastructure investments. c. U.S. operators have limited experience with gasifying American coal. d. Coal-to-liquid technology is virtually non-existent in the U.S. and worldwide. Correct answer: c. Reason: CTL production based on FT or MTG synthesis is ready for commercial development in the United States. There is, however, some risk that first-of-a-kind FT or MTG CTL plants could experience severe performance shortfalls or other operational problems, especially during their initial operating years. This risk stems from the limited commercial experience in gasifying U.S. coals and the challenges associated with building a plant that is very large, highly integrated, and technically complex.
Price of European put option. ______ On January 1, a European-type call option for WTI crude with a strike price of $60/bbl and an expiration date of July 1 is priced at $3.90 per barrel. At the same time, July WTI futures are priced $55/bbl. The risk free interest is 8% per annum. The price of a WTI European Put option with a strike of $60/bbl and matures in 6 months is closest to: a. b. c. d.
$5.50 $6.50 $7.50 $8.50
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Correct answer: d. Reason: This question relates two concepts—the put call parity and the relationship between the price of the physical commodity and its representation as a commodity futures contract. The spot price of a commodity, S(t), is widely considered as the most important indicator of future spot prices and such acts as the chief factor determining the shape of the futures price curve. At maturity, the price of the physical, underlying, commodity and the financial commodity future, F(t,T) should be equal to preclude arbitrage. Because of the equilibrium assumption, the convergence of physical and financial prices holds true, which at expiration at time (T) can be expressed as F(T, T) = S(T). Up to expiration, i.e., where t
Volatility. ______ You are trading in an electricity market, where the volatility of electricity generated by peakperiod, gas fired plants is 28% and increasing. What volatility would you then expect from electricity generated from baseload coal? For more practice questions and information for the ERP exam, please go to www.energyriskprofessional.com
a. b. c. d.
Greater than 28% Less than 28% Unknowable Equal to 28%
Correct answer: b. In all likelihood the baseload material used for electricity generation is coal (see below), and natural gas trades higher than coal. In this case, baseload coal is being used to provide a constant energy and natural gas is being used to supplement peak load energy demands. Of all the fossil fuels, coal is the most widely used. According to the EIA, during 2004, 50% of the nation’s electric power was generated at coal-fired plants. Based upon 2004 net generation shares by energy source, nuclear and natural gas are next in popularity after coal. While base load is constant and fairly predictable, electric utilities must be prepared at all times for the sometimes unpredictable demand seasonal weather changes cause. An increase in demand is referred to as peak load and intermediate load.
Managing credit-risk exposure. ______ Which of the following is NOT a method for managing credit-risk exposure within energy markets? a. b. c. d.
Clearing OTC energy derivatives Obtaining credit risk insurance Purchasing commodity futures Securing a financial guarantee via an Irrevocable Standby Letter of Credit
Correct answer: c. Reason: Methods for managing credit-risk exposure include: 1. master netting 2. collateralization 3. financial guarantees For more practice questions and information for the ERP exam, please go to www.energyriskprofessional.com
4. 5. 6. 7.
credit insurance credit derivatives assignment clearing OTC energy derivatives.
The purchase of commodity futures is a hedging strategy.
Credit-risk hedging. ______ Emily Smith, ERP, manages the cost of jet fuel for a small charter airline company in the Northeastern United States. The company is struggling, and a significant consideration for the company is to hedge against anticipated increases in fuel costs in the coming six months. Due to the company’s poor financial standing—it has limited ability to raise cash and its credit lines are very close to being completely drawn down; Emily’s ability to reduce the impact of adverse price movements is largely limited. Given these constraints, which of the following alternatives could best mitigate the adverse effect of a significant increase in jet fuel prices? a. b. c. d.
Buy out of money call options on jet fuel Buy at the money call options on jet fuel Enter into a long jet fuel futures position Enter into a long jet fuel forward position
Correct answer: a. Reason: There are some companies whose credit risk is such that it is much easier for them to buy options rather than sell options. This is because the option buyer normally pays the upfront one or two business days after transacting, and thus poses a far lower credit risk than an option seller, who does not settle his obligations until maturity (or upon early exercise). Given smaller credit exposure, companies of lesser credit-standing can normally transact on equal with top credits when they are pure options buyers. With limited credit lines, futures and forwards (assuming they are margined) pose a potential collateral requirement in the future which would be a problem for the company in the example. Typical examples of companies using this kind of option strategy might be a privately owned shipping company which buys an OTC fuel oil cap as a hedge against an increase in bunker fuel prices, or a small charter airline that buys a jet fuel cap. Typically, these would settle in cash against the monthly average price of an appropriate index. For more practice questions and information for the ERP exam, please go to www.energyriskprofessional.com
In this scenario, an out-of-the-money call should be cheaper than an at-the-money call. On the other hand, it only protects against significant price movements, and even then only a small portion of the adverse movement’s negative effects will be offset. For a futures position, the cash outlay would be smaller for the option than the futures margin position, where collateral is required. To trade forward, you should need to post collateral or reduce counterparty credit risk for the other party.
Alternative energy risk. ______ Which of the following is NOT a main driver behind investments in alternative energy projects? a. b. c. d.
Labor disputes Oil and natural gas prices Tax incentives Public sentiment
Correct answer: a. Reason: The following items, while not comprehensive, serve as a good starting point for understanding alternative energy drivers: oil and natural gas prices; taxes, politics, and regulations; geopolitical environment; technological advancements; supply chain costs; and sentiment.
What are the most common alternative energy drivers (7)? ______ 1. 2. 3. 4. 5. 6. 7.
Oil and natural gas prices. Taxes. Politics and regulations. Geopolitical environment. Technological advancements. Supply chain costs. Sentiment.
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Spot price volatility. ______ The spot price volatility of WTI crude is 0.3, or 30%, and the spot price is $71.21. Assuming the return of WTI is normally distributed with zero drift, over the next year one can roughly expect the price of WTI to be (blank) 66% of the time. a. b. c. d.
$45.57 - $96.85 $49.85 - $94.18 $49.85 - $92.57 $45.57 - $94.96
Correct answer: c. Reason: Volatility roughly represents the percentage of the price range within which we can expect to see the prices 66% of the time. For example, if the spot price volatility is 0.1, or 10%, and if the spot price is currently $20, then over the next year we can-very roughly-expect the price to be within the $18 to $22 range 66% of the time. For this problem, $49.85 and $92.57 represent the plus/minus 30% volatility range off of $71.21.
FERC and EPA act. ______ The FERC and EPA Act of 2005 reasserts the Federal Energy Regulatory Commission’s roles in all of the following EXCEPT: a. b. c. d.
Supervising financial practices and corporate governance in energy markets ing the principle of competition in wholesale power markets Strengthening regulatory powers to ensure fair competition and avoid consumer exploitation Developing a stronger energy infrastructure
Correct answer: a.
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Reason: Supervising financial practices and corporate governance are powers granted under the Sarbanes-Oxley Act of 2002 and applies to all corporations and industries, not just those in energy markets.
When futures prices for short maturities in the crude oil market are more expensive than those maturing later, the market is … . ______ backwardated. F<S
Which are the five events and disputes that come up with a physical contract? ______ Events and disputes that may come up with a physical contract include: 1. 2. 3. 4. 5.
Force majeure Quality of the commodity being delivered Default on a debt Missed payments Missed deliveries
Credit ratings are not created in a contract but rather via third parties.
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How often does one have to file an updated application to maintain the position limit exemption for exposure associated with NYMEX? ______ Annually, not quarterly. Any person who has received from the Compliance Department written authorization to exceed position limits imposed under Rule 9A.27 (Expiration and Current Delivery Month Position Limits) must file with the Exchange an updated application annually not later than the anniversary date of the initial authorization, or waive the exemption.
A landman's responsibilities are ... . ______ strictly legal
According to the Securities Exchange Commission (SEC), how long must an ant maintain all audit review records after a review has concluded? ______ 5 years.
What is the main advantage of Monte Carlo simulations? ______ The advantages of Monte Carlo simulations include the ability to model evolution of risk factors over the holding period. Furthermore, there is no need to approximate portfolio values in this method—they are computed exactly. For more practice questions and information for the ERP exam, please go to www.energyriskprofessional.com
Hence, the method can be used for estimating VaR in nonlinear portfolios, which is a valuable characteristic for energy portfolios with assets. However, Monte Carlo simulation can be very expensive if many risk factors are being considered.
Futures can be used only to reduce the impact of ..., and they do not have any impact on ... . Futures can be used only to reduce the impact of ..., and they do not have any impact on ... .______ Futures can be used only to reduce the impact of price volatility, and they do not have any impact on the availability of a good. The producer is exposed to directional risk, i.e. the price of Brent crude, and basis risk, i.e. the s and discounts in the price formula. Consequently, by transacting futures he can only reduce the market risk, not the basis risk. Example: It is quite usual that crude oils extracted in West Africa are sold based on a formula indexed to Brent crude plus s and discounts, decided case by case on each cargo. If a West African producer is also executing futures on Brent, which type of risk is likely reduced? a. Basis risk and supply risk b. Basis risk and directional risk c. Supply risk d. Market risk Correct answer: d
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Describe gas basis. ______ Gas basis is the price difference between locations. Decentralization introduces geographic “basis risk,” which is unique to energies. In financial markets, today’s dollar is worth a dollar anywhere in the country. In energy markets, price depends on location. A megawatt of electricity is priced according to delivery point; the same holds true for natural gas. Location is a fundamental driver of price. Pilipovic defines “basis risk” as: The difference in prices between identical products but in two different markets.
Pilipovic defines “basis risk” as ... . ______ Basis risk is the difference in prices between identical products but in two different markets.
Which three methods can be used to evaluate crude oil for a refinery? What is important to consider? ______ 1. Break-even analysis 2. Crude oil replacement economics 3. Crude oil absolute economics Because crude oil value can vary more than USD 1–2/bbl, depending on the evaluation method, it is important to use an evaluation technique the closely resembles the method by which crude oil will be processed.
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EPAct gives the Commission [ civil / criminal ] penalty authority. EPAct gives the Commission [ civil / criminal ] penalty authority.______ EPAct gives the Commission civil penalty authority, which the Commission has indicated it will exercise carefully by assuring that its market manipulation rules are clear. This will make it easier for regulated entities to assure compliance, and make it easier for the Commission to identify violations.
Calculating load factor, example. ______ A generating plant has a nameplate rating of 650 megawatts and is expected to be offline for 720 hours for a scheduled outage during the year. A typical year has 8,760 hours. Actual generation during the year was 4,270,500 megawatt hours. What is the plant’s load factor? Correct answer: 75%. 4,270,500 MW / (650 MW x 8,760h) = 0.75. Load factor = actual generation / possible generation = average load / peak load. Scheduled outages are not reflected in the denominator.
What does SOX mandate for off-balance sheet transactions, what for derivative or hedging instruments? ______ SOX stipulates that each annual and quarterly financial report filed with the SOX Commission must disclose off-balance sheet transactions.
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Sarbanes-Oxley Act plays no role in establishing ing mechanisms for derivative or hedging instruments.
Can a forward be resold without the approval of one party? ______ No, both parties have to approve the sale. It is not purchased on an exchange.
Which are cheaper, gas turbines or steam turbines? ______ Gas turbines are cheaper than steam turbines. Steam turbines typically require boilers, boiler feed water makeup facilities, and steam condensers, which drives up their price.
Which contracts do LNG buyers generally prefer? ______ LNG buyers typically seek multiple smaller LNG contracts to diversify their supply sources and match the requirements of newly liberalizing and competitive LNG markets. In contrast, the trend with the Qatari mega-trains has been to have the sponsors emerge as the buyers for the entire train production and assume the risk of placing the LNG in the market.
What does an associated gas well and a non-associated gas well produce? ______ Associated gas well: Methane and crude oil. For more practice questions and information for the ERP exam, please go to www.energyriskprofessional.com
Non-associated gas well: Almost all pure methane.
What is the leading cause of dam failures? ______ Too much rain. Poor construction, failure of inspections, etc. are contributing causes, but dam failure almost always starts with heavy rains.
Describe the startup of the Oryx FT plant in Qatar. ______ The sheer size and complexity of an FT CTL plant brings additional risks. The unanticipated difficulties experienced by Sasol in starting up its FT GTL Oryx plant in Qatar are a case in point. A problem with the FT section of the plant seriously constrained initial operational capacity. Post-construction modifications required to correct this problem caused the plant start-up period, which normally requires a few months, to extend to at least 18 months during which “the Oryx t venture only generated a marginal cash contribution.” As Sasol reported, “our experience is that starting up technically complex and first-of-kind facilities takes time and is inherently problematic.”
Why do oil pipelines carry multiple products, and gas pipelines do not? ______ Oil goes through major transformation at refineries before it is suitable for consumptions by its various customers. Thus, oil products pipelines carry multiple products. Natural gas is transported “as is” from the wellhead all the way to consumers, with the exception of some minor processing at gas plants. Gas pipelines do not carry multiple products.
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How does zonal transmission handle constraints and redundancy? ______ Not well. Zonal transmission does not handle more local issues such as constraints and redundancy very well.
Where are energy forwards traded? ______ On the ICE. They are not standardized and not processed through clearinghouses.
For historical volatility that will be used in a GBM process, we need to ... (2). For historical volatility that will be used in a GBM process, we need to ... (2).______ For historical volatility that will be used in a GBM process, we need to: 1. calculate standard deviation of logarithmic price returns (ln S1/S0) 2. annualize the standard deviation by scaling it by the appropriate factor (√t)
What is the largest risk in geothermal power generation? ______ Geothermal drilling activity ceased in Switzerland, for example, when a geothermal drilling program was blamed for low-level earthquake activity. This risk can be fatal. Loss of reservoir water can be overcome by pumping down water, and nationalization is always a risk, but geothermal projects don’t seem to rank high on a government takeover list. Geothermal wells are 10-30 miles away from penetrating the earth’s crust. For more practice questions and information for the ERP exam, please go to www.energyriskprofessional.com
Example: The largest risk faced by geothermal power is: a. Loss of reservoir water causing steam generation to diminish. b. Inducing earthquakes. c. Underground energy sources expropriated by a government. d. Starting a volcanic eruption through the geothermal drill hole. Correct answer: b.
Geothermal wells are ... miles away from penetrating the earth’s crust. Geothermal wells are ... miles away from penetrating the earth’s crust.______ Geothermal wells are 10-30 miles away from penetrating the earth’s crust.
Explain a countertrade. ______ Countertrade means exchanging goods or services which are paid for, in whole or part, with other goods or services, rather than with money. A monetary valuation can however be used in counter trade for ing purposes. If there is a netting agreement, a countertrade reduces settlement risk of sold forward contracts and locks actual replacement risk. Since the countertrade is concluded at the actual market price and the replacement risk cannot be reduced.
What are the effects of a countertrade (2)? ______
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If there is a netting agreement, a countertrade: 1. reduces settlement risk of sold forward contracts and 2. locks actual replacement risk. Countertrade means exchanging goods or services which are paid for, in whole or part, with other goods or services, rather than with money.
What were the goals (3) of the FERC Standards of Conduct for Transmission Providers? ______ The vast majority agreed with the Commission’s goals of simplifying the Standards in order to achieve: 1. Greater clarity 2. Greater efficiencies of operation 3. Greater ease of compliance The Commission therefore adopts the employee functional approach, as set forth in the regulatory text, and eliminates the concept of energy s.
Does the lognormal distribution represent the size distribution of small fields well? ______ No.
Which standard requires disclosure of the fair values of derivative instruments and their gains and losses in a tabular format? ______ For more practice questions and information for the ERP exam, please go to www.energyriskprofessional.com
FASB Statement No. 161, not Sarbanes-Oxley, requires disclosure of the fair values of derivative instruments and their gains and losses in a tabular format.
Which is the most sophisticated emissions trading market? Which commodity is traded? ______ The sulfur dioxide (SO2) emissions-trading market is the most sophisticated emissions-trading market in the world and one of the oldest. The SO 2 market is also the most liquid of all environmental markets. SO2 has been actively traded daily in spot and forward markets since the inception of the market and can now be traded on regulated futures markets. The annual value of SO2 trades is USD 3billion.
Describe a royalty on an LNG project. ______ Typically speaking, in the upstream, royalties are a common device by which governments can secure a share of a project's revenue. High royalties can be onerous to an LNG project, since they involve a payment to the sovereign made directly out of the sales revenues irrespective of the project’s actual earnings. These royalties can be on oil and/or gas; in the case of an LNG project, any liquids produced are often subject to the same royalties as oil production. Royalties are usually expressed as a percentage of initial revenue. For current LNG projects, they generally fall in a range of 5%–20%. Less commonly, they can be calculated as a fixed unit cost (USD /MMBtu).
Calculate net exposures in hedging, example. ______ Virgin Oil is a crude oil producer willing to hedge 100% of its future production along the next calendar year. In order to achieve this objective, it sells a swap on Brent crude for 1 million barrels at USD 60/bbl. Later the company discovers that the real production will be 20% lower than estimated. Bank “A” offers to buy from Virgin Oil swaps Brent crude for 200,000 barrels, at a price of USD 50/bbl. Bank “B” offers to buy from Virgin Oil swaps Brent crude for 500,000 For more practice questions and information for the ERP exam, please go to www.energyriskprofessional.com
barrels at a price of USD 53/bbl. Put in order the following four different options, from the least to the riskiest: I. Doing nothing. II. Accept the offer from bank “A.” III. Accept the offer from bank “B.” IV. Unwind everything. a. II, III, IV, I b. II, I, III, IV c. III, IV, II, I d. I, III, II, IV Solution: B. The net resulting exposure of the four options are: I (-200,000 bbls), II (0 bbls), III (+300,000 bbls), IV (800,000 bbls).
Measurement of natural gas, example. ______ The English unit of volume measurement for natural gas is a cubic foot (ft3). Because gas expands/contracts with pressure and temperature changes, the measurement is made under or is converted to standard conditions which is: a. The way it has been done since natural gas was first used as a commodity. b. The correct way to do it. c. Defined by law. d. Defined by the industry. Correct answer: c. The English unit of volume measurement for natural gas is a cubic foot (cf). Because gas expands/contracts with pressure and temperature changes, the measurement is made under or is converted to standard conditions defined by law. It is usually 60°F and 14.65 psi (15°C and 101.325 kPa) and is called standard cubic feet (scf). The abbreviation for 1000 cubic feet is Mcf, a million cubic feet is MMcf, a billion cubic feet is For more practice questions and information for the ERP exam, please go to www.energyriskprofessional.com
Bcf and a trillion cubic feet is Tcf. Condensate content is measured in barrels per million cubic feet of gas.
Describe standard cf. What is the convention? ______ Because gas expands/contracts with pressure and temperature changes, the measurement is made under or is converted to standard conditions defined by law. The convention of standard cubic feet (scf) is usually:
60°F (15°C) 14.65 psi (101.325 kPa)
What causes a volatility smile? ______ The reason there is such a thing as a volatility “smile” (or “frown” as the case may be) is that differing Black-implied volatilities for options with same specifications but different strikes are necessary to capture the true underlying price behavior and therefore traded option prices. Black option pricing model assumes log-normal price behavior for the underlying forward prices, which generally does not capture the full spectrum of behavior of energy prices given a single volatility measure.
Time series analysis is necessary for ... , distribution analysis is important in ... . ______ Time series analysis is necessary for calibrating model parameters.
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Distribution analysis is important in comparing long-term price behavior to model-implied behavior.
What is instantaneous volatility? ______ Instantaneous volatility = historical volatility
Describe capital costs for an FT CTL plant. ______ Capital costs are defined as all outlays made after the decision to construct a commercial plant and prior to the production of salable products. Capital costs, as defined in this approach, do not include factors to for either inflation or interest accrued during construction. The effects of interest payments during construction are ed for in the discounted-cash-flow calculations. For an FT CTL plant, our capital costs do not include investments associated with developing the mine or mines that will supply coal to the plant. Instead, we assume that coal will be purchased via long-term contracts at prices that for the costs associated with developing and operating a coal mine.
Which criterium is most often used to asses the fair price of a pipeline? ______ Economic value. There are various ways of calculating economic value. Together they are the criteria most often used to establish the seller’s bottom acceptable price and the purchaser’s maximum purchase price. Existing pipelines have a history of return. Potential purchasers may base the price they are willing to pay on forecasts of volumes, rates, and expenses based on history. The forecasts are used to develop a future stream of cash flows. These are then discounted to arrive at a value, called net present value (NPV). For more practice questions and information for the ERP exam, please go to www.energyriskprofessional.com
PUC, example. ______ Which of the following statements regarding public utility commissions (PUCs) is NOT true? a. All states have PUCs to govern actions of state regulated utilities. b. PUCs are considered quasi-judicial and quasi-legislative entities. c. PUCs hold hearings to fix rates that may be charged by utilities, but may not investigate service related issues. d. PUCs hold hearings to fix rates that may be charged by utilities. Correct answer: C. PUCs are considered to be quasi-judicial and quasi-legislative entities. There is no real separation of power, since they act as , judge, and legislator . Commissions act as when, for instance, they investigate rates or service. In a judicial capacity, PUCs exercise this power when they hold hearings, examine evidence, and make final determinations of a particular utility’s conduct.
What is the most glaring flaw of the Hubbert theory of decline? ______ One glaring issue with Hubbert’s model is that it makes time the only explanatory variable for the production of a region, thereby disallowing the possibility of reserves being created as a result technical progress. Around 1960, King Hubbert, then an engineer at Shell, forecast, by fitting a normal curve to the production profile of 48 American states, that production would reach its peak in 1969. Production would then decline in a manner symmetrical to the growth phase. The fact that his theory was vindicated for one particular example does not mean, however, that his model has been validated generally. Even if, in several regions of the world, production profiles are found to be distributed normally, there is no reason to believe that all production profiles will display a normally distributed pattern.
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However attempts have been made to explain or justify the Hubbert phenomenon “mathematically.” One such attempt appeals to one of the most celebrated theorems of probability theory: the central limit theorem. This states that under certain regularity hypotheses the sum of a large number of independent random phenomena (even if highly asymmetric or multimodal) tends to produce a random variable with a normal distribution, that is, symmetrical with a bell-shaped distribution, like that used in the Hubbert approach. But the probability density of the sum is not equal to the sum of the probability density (in this case the production profiles of the fields). Furthermore the Hubbert phenomenon does not fall within the scope of this theorem. In the first place the production profiles summed are obviously not independent of one another, particularly when they relate to the same geographical zone, and secondly the theorem relates to numerical distributions rather than temporal distributions, as in Hubbert’s model. Temporal distributions are subject to a completely different tool of probability theory, namely time series analysis. Great care must therefore be taken not to misuse this method which, however appealing it may seem on the basis of a few examples, has no scientific basis. If certain aggregated profiles exhibit the characteristics of the normal distribution, these are curiosities, the real reason for which it would be very interesting to explore, rather than a phenomenon of general applicability as claimed by Hubbert and his numerous followers. Hubbert himself ended up by repudiating the normal curve in favor of the logistic curve which unfortunately is no more justified than the normal curve.
Explain Section 409 of Sarbanes-Oxley. Section 409 of Sarbanes-Oxley.______ According to Section 409 of Sarbanes-Oxley, Real Time Issuer Disclosures: Each issuer reporting under section 13(a) or 15(d) shall disclose to the public on a rapid and current basis such additional information concerning material changes in the financial condition or operations of the issuer, in plain English, which may include trend and qualitative information and graphic presentations, as the Commission determines, by rule, is necessary or useful for the protection of investors and in the public interest.
Calculating value of options positions, example. ______ Assume you hold a short put position with a strike price of EUR 40 and a long call position with a strike price of EUR 40. At expiration, the spot price of the asset is EUR 50. What is the value of your combined positions? For more practice questions and information for the ERP exam, please go to www.energyriskprofessional.com
Correct answer: The payoff from the short put is -max[K-S,0] = -max[40-50,0] = 0. The payoff for the long call is max[S-K,0] = max[50-40,0] = EUR 10. The sum is EUR 10.
Which options imply higher Black-equivalent volatilities, daily or monthly-settled options? ______ Daily settled options imply generally much higher Black-equivalent volatilities than do monthlysettled options for the same month of delivery. This is due to several factors. The fact that monthly settled options are options on an average of daily forward prices that tend to exhibit non-perfect correlations allows for averaging effects which diminish the effective volatility of the average relative to the daily-settled volatility. Also, since daily settled volatilities settle into next day delivery, the daily option volatilities get the benefit of riding up the steep volatility curve all the way to the day of delivery, whereas monthly-settled options do not get this benefit as they expire prior to the first day of delivery in the month.
How are monthly settled options and daily settled options related? ______ Monthly settled options are options on an average of daily forward prices that tend to exhibit non-perfect correlations allows for averaging effects which diminish the effective volatility of the average relative to the daily-settled volatility.
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Does the comparable sales method work well to assess the market value of a pipeline? ______ No. Establishing value based on sales of similar items works well where similar assets, like houses, are sold every year, thus establishing a market value. It does not work well for pipelines. Too many adjustments are needed to arrive at an appropriate value—age, throughput, and the supply/demand outlook for the commodities being transported. Buyers and sellers may use similar sales as indicators to help them understand the range of values. However, this valuation method normally only complements the economic value method in pipeline sales.
Calculate the spark spread, example. ______ We assume that the heat rate of a natural gas peaking unit is 10,000 Btu/kWh. The price of electricity is USD 25.00 per MWh, and the price of natural gas is USD 2.00. What is the spark spread in USD per kWh? Correct answer: USD 0.005/kWh. Output price: USD 25/MWh = USD 25/1,000 kWh = USD 0.025/kWh. Input price: 10,000 Btu/kWh x USD 2.00/MmBtu = 10,000 Btu/kWh x USD 2.00/1,000,000 Btu = USD 2.00/100kWh= USD 0.02/kWh. The spark spread is therefore USD 0.005/kWh.
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How can VaR be adjusted for extreme events? ______ With stress testing.
ing for futures, example. ______ During the entire period of a contract, the contract holder must: a. Report revenues to the Commodities Futures Trading Commission. b. Must not keep separate s for tax purposes. c. Keep separate s in accordance with ing procedures appended to the contract. d. Notify local governing bodies (e.g. city council) that a contract has been made. Correct answer: C. During the entire period of validity of the contract, the contract holder must keep separate s in accordance with ing procedures appended to the contract. These procedures are set up in accordance with the rules applying in the country concerned, but may be subjected to slight changes to allow them to cater for specific petroleum mechanisms, for example depreciation procedures, the period of carry-forward of losses and the definition of petroleum costs. The clause in the main agreement relating to the s of the contract holder can therefore be quite short because it will refer to the ing procedure in which all the practical procedures are indicated. It will specify the currency in which s are to be kept (often U.S. dollars), rules for conversion and the right of the government to have the s audited.
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The Federal Energy Regulatory Commission (FERC) is responsible for the interstate transmission of ... (4). ______ 1. 2. 3. 4.
Electricity Natural gas Oil Licensing and inspecting LNG projects
The Federal Energy Regulatory Commission, or FERC, is an independent agency in the United States that regulates the interstate transmission of natural gas, oil, and electricity. FERC also regulates natural gas and hydropower projects.
What is used to assess whether to record a financial gain or loss for a sale of a pipeline? ______ Book value is used by sellers to allow them to understand if they need to record a financial gain or loss for the sale of pipelines. It is not particularly useful for purchasers, since book value has little relevance to what the asset is currently worth. Sometimes it is used to reallocate ownership between t venture partners if the venture was set to provide for this approach.
Tank size = ... (formula). ______ Tank size = (Average daily demand x Cycle time) + Safety stock + Tank bottoms + Safe fill allowance
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Calculating capacity requirement, example. ______ An electric market uses a capacity market to promote the building of new capacity. Given the following information, how much capacity (MWs) would an end-use customer be required to purchase? Expected end- peak load: 100 MW Average end- load: 90 MW Percentage reserve margin: 10% a. 10 MW b. 110 MW c. 100 MW d. 99 MW
Correct answer: b. Capacity requirement = peak load time x (1+ reserve margin %).
Capacity requirement = ... (formula). ______ Capacity requirement = peak load time x (1 + reserve margin %)
Which specifications for the quality of the gas from an LNG terminal must a supplier of LNG fulfill? ______ The quality of the gas that comes from an LNG import terminal must be consistent with the requirements of downstream gas customers or meet the specifications of the interconnected gas transmission lines, which vary by region and by country. For more practice questions and information for the ERP exam, please go to www.energyriskprofessional.com
For example, receiving facilities located close to producing regions may be permitted to accept LNG with wide-ranging and fairly high calorific values. The Lake Charles, LN, receiving terminal can import lean LNG from places such as Trinidad, as well as rich LNG from Australia and Qatar. This is because the regasified LNG immediately mingles downstream from the terminal with gas production from the Gulf of Mexico and is often treated in NGL-processing plants before being sent on to market. But LNG import terminals that are located in market areas or that serve buyers with specific gas quality restrictions must closely monitor and, where necessary, adjust the quality of the regasified LNG that is delivered into the local grid.
How are underground storage salt caverns formed (2)? ______ 1. Dissolving with fresh water (leaching) 2. Hard rock mining Underground gas storage caverns can be constructed by leaching with fresh water, as is common in the U.S. Gulf Coast, or via hard rock mining, as popular in the Eastern U.S. and in parts of Europe.
As the complexity of the refinery increases the gasoline yield [ increases / decreases ] and the residual fuel yield [ increases / decreases ]. ______ As the complexity of the refinery increases
the gasoline yield increases and
the residual fuel yield decreases (the residual fuel stream is being converted to gasoline).
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Vega for puts and calls with the same strike are ... . ______ Vegas for puts and calls with the same strike are the same. This follows from the put call parity relation, X + c = S + p.
Describe the functions of an RTO (2). ______ Regional transmission organizations (RTO) help improve transmission to overcome locational issues For example, RTOs have coordinated planning for logical transmission expansion.
On-peak options. ______ You are concerned with high electricity prices for the month. Monthly on-peak options are available at USD 75 per megawatt for a 100 MW contract. If you purchase a monthly on-peak power option contract, how many megawatt hours will you receive, assuming there are 20 business days per month? a. 32,000 mWh b. 48,000 mWh c. 16,000 mWh d. 2,000 mWh Correct answer: A. 16 hours per day times 20 days, times 100 MWs = 32,000. b is incorrect, since calculations assume 24 hours per day. c is incorrect, since calculation assumes 8 on-peak hours per day. d is incorrect, since calculation assumes zero hours during the day. For more practice questions and information for the ERP exam, please go to www.energyriskprofessional.com
Describe the volatility used in the Ornstein-Uhlenbeck process. ______ The volatility for the Ornstein-Uhlenbeck process has units of dollars. The volatilities in BlackScholes and Ornstein-Uhlenbeck are not interchangeable. Volatility has to be estimated in the context of the stochastic process assumption. The volatility for an Ornstein-Uhlenbeck process has different units to that which is used in the Black-Scholes model. The Ornstein–Uhlenbeck process is also known as the mean-reverting process, is a stochastic process. The process is one of several approaches used to model (with modifications) interest rates, currency exchange rates, and commodity prices stochastically. The parameter μ represents the equilibrium or mean value ed by fundamentals; σ the degree of volatility around it caused by shocks, and θ the rate by which these shocks dissipate and the variable reverts towards the mean. One application of the process is a trading strategy pairs trade. The Ornstein–Uhlenbeck process is a prototype of a noisy relaxation process.
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[email protected]
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Determinant of cost in off-shore drilling. ______ For the development of an off-shore drilling project, the (blank) is the main determinant of cost. a. b. c. d.
basic engineering survey reservoir type cost associated with transporting equipment and bulk material water depth
Correct answer: d. Reason: The capital cost of developing an oil or gasfield may amount to several billion dollars. It is crucial that the key parameters are identified and evaluated so that the project can be properly defined and its viability assessed, because some of these parameters strongly influence the costs. Onshore, the nature of the terrain is the main determinant of costs. Offshore it is the water depth, which may be conventional (to 300 m), deep (to 1500 m) or ultra-deep (over 1500 m). A basic engineering survey represents about 2% of the technical costs of an off-shore drilling project, while transporting equipment and bulk material represents about 7.5% of the total cost. Reservoir parameters determine the number of wells required, and whether water or gas injection will be needed during the lifetime of the field.
Distinguish between the three types of water depth. ______ 1. Conventional (0 to 300 m) 2. Deep (300 to 1500 m) 3. Ultra-deep (over 1500 m)
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Effective price paid per barrel. ______ On July 20, Merg Refining knows it will need to purchase 20,000 barrels of crude in November. On NYMEX, oil futures contracts are traded for delivery every month. Thus, Merg decides to hedge using a mid-December contract. The futures price on July 20 is $60.00/bbl. On November 12, Merg is ready to purchase their needed crude and closes out its futures contract on that day; at this time the spot price is $62.00/bbl and the futures price is $61.10/bbl. In this scenario, the effective price paid per barrel is a. b. c. d.
$60.00 $60.90 $62.10 $62.90
Correct answer: b. Reason: The effective price paid (in dollars per barrel) is the final spot price less the gain on the futures, or 62.00 – 1.10 = 60.90. This can also be calculated as the initial futures price plus the final basis, 60.00 + 0.90 = 60.90. If Merg waited until expiration of the futures contract and took delivery, then the price paid would be $60.00, as gains on the futures perfectly offset the change in the spot.
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Price hedging. ______ […] risk in the natural gas market can be hedged with a […]. a. b. c. d.
Operational / futures contract Counter-party / plain vanilla swap Regulatory / letter of credit Market price / forward contract
Correct answer: d. Reason: If a forward contract is used to make or take delivery of the underlying commodity, then it has eliminated market risk by locking in the price of the physical commodity. A long forward contract can effectively be “closed out” by selling a contract for the same physical specification, location, volume and month before physical delivery commences; the mark-tomarket value of a forward contract tells us the value of doing so at the current market level.
Crude prices. ______ Given the following, simplified table of U.S. Gulf Coast refining margins at a given time, which is NOT true: Light Crude Medium Crude Heavy Crude
Crude Price $/bbl 21.00 20.00 15.00
Simple 0.10 (0.35) (3.16)
Refining Margins—$/bbl Complex Very Complex 0.30 0.35 0.65 1.52 3.60 4.60
a. Simple refineries break even more or less on light crude, but lose money handling heavier crudes. b. Medium crudes are profitable in complex refineries but not in simple ones. c. Complex refineries are highly profitable running heavy crude, but they may have difficulty competing for space against very complex refineries running the same crude. d. Heavy crude is too expensive and may have to come down in price to compete with medium and light crudes.
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Correct answer: d. Reason: All of the above are true except for number four. In fact, the light crude may be too expensive and may have to come down in price in order to compete with heavy crude.
Hedge effectiveness. ______ What measure of hedge effectiveness did FASB 133 recommend? a. b. c. d.
60/40 offset ratio 90/10 offset ratio “highly effective” offset ratio None of these
Correct answer: c. Reason: FASB has chosen to use a “highly effective” offset ratio as a measure of hedge effectiveness, rather than specifying a numeric ratio. If the fair value hedge is fully effective, the gain or loss on the hedging instrument, adjusted for the component, if any, of that gain or loss that is excluded from the assessment of effectiveness under the entity’s defined risk management strategy for that particular hedging relationship (as discussed in paragraph 63 in Section 2 of Appendix A), would exactly offset the loss or gain on the hedged item attributable to the hedged risk. Any difference that does arise would be the effect of hedge ineffectiveness, which consequently is recognized currently in earnings. The measurement of hedge ineffectiveness for a particular hedging relationship shall be consistent with the entity’s risk management strategy and the method of assessing hedge effectiveness that was documented at the inception of the hedging relationship, as discussed in paragraph 20(a). Nevertheless, the amount of hedge ineffectiveness recognized in earnings is based on the extent to which exact offset is not achieved. Although a hedging relationship must comply with an entity’s established policy range of what is considered “highly effective” pursuant to paragraph 20(b) in order for that relationship to qualify for hedge ing, that compliance does not assure zero ineffectiveness. Section 2 of Appendix A illustrates assessing hedge effectiveness and measuring hedge ineffectiveness. Any hedge ineffectiveness directly affects For more practice questions and information for the ERP exam, please go to www.energyriskprofessional.com
earnings because there will be no offsetting adjustment of a hedged item’s carrying amount for the ineffective aspect of the gain or loss on the related hedging instrument.
Default probability of bonds. ______ Taking into a snapshot from the table below, one can calculate that the probability of a B2 rated bond defaulting in the fourth year is (blank), and survive until the end of year three is (blank). Default probability in % Moody’s Rating Year 1 2 3 4 5 B1 4.680 8.3800 11.5800 13.8500 16.1200 B2 7.1600 11.6700 15.5500 18.1300 20.7100 B3 11.6200 16.6100 21.0300 24.0400 27.0500 Caa1 17.3816 23.2341 28.6386 32.4788 36.3137
a. b. c. d.
2.58%; 84.45% 4.28%; 78.97% 5.91%; 71.36% 7.54%; 65.30%
Correct answer: a. Reason: The unconditional default probability of a B2 rated bond in year four is calculated as 18.13 – 15.55 = 2.58%. The probability the bond will survive to end of year three is calculated as 100 – 15.55 = 84.45%. Each probability represents a cumulative default probability or the probability of default by that year.
Pipeline rates. ______ If the cost of shipping 1,000 bbl of crude from Tuscon, AZ to St. Louis, MO via truck is $25/bbl, and by rail is $21/bbl, all things being equal, an ideal charge on a pipeline with existing capacity to transport 1,000 bbl should be:
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a. b. c. d.
$21.00 - $25.00/bbl $19.50 - $21.00/bbl $24.50 - $25.00/bbl $20.00 - $21.50/bbl
Correct answer: b. Reason: The cost of alternative transportation method involves understanding the rates charged by the competing forms of transportation—ship, barge, rail, truck. The pipeline charge will be set equal to or slightly below those rates. Calculating rates using this method can be very favorable for the pipeline owner, especially for long-distance transportation. EOG Resources has paid as much as $25/bbl to ship crude by truck, but have switched to rail because this cost is just uneconomical (Reuters: March 12, 2009).
Single investments in the LNG chain. ______ Rank, in order of increasing costs, single investments of the liquefied natural gas chain. a. b. c. d.
Natural gas exploration; Receiving terminal; LNG ship; Liquefaction plant LNG ship; Natural gas exploration; Liquefaction plant; Receiving terminal Natural gas exploration; Liquefaction plant; LNG ship; Receiving terminal Receiving terminal; LNG ship; Natural gas exploration; Liquefaction plant
Correct answer: a. Reason: The heart of an LNG project and the largest single investment in the chain is the liquefaction plant.
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Coal-to-liquid production plants. ______ Development of coal-to-liquid production plants in the United States is risky because a. Technology to deal with concomitant carbon dioxide emissions have yet to be developed. b. Coal is a relatively scarce resource in the U.S. and would require major transportation infrastructure investments. c. U.S. operators have limited experience with gasifying American coal. d. Coal-to-liquid technology is virtually non-existent in the U.S. and worldwide. Correct answer: c. Reason: CTL production based on FT or MTG synthesis is ready for commercial development in the United States. There is, however, some risk that first-of-a-kind FT or MTG CTL plants could experience severe performance shortfalls or other operational problems, especially during their initial operating years. This risk stems from the limited commercial experience in gasifying U.S. coals and the challenges associated with building a plant that is very large, highly integrated, and technically complex.
Price of European put option. ______ On January 1, a European-type call option for WTI crude with a strike price of $60/bbl and an expiration date of July 1 is priced at $3.90 per barrel. At the same time, July WTI futures are priced $55/bbl. The risk free interest is 8% per annum. The price of a WTI European Put option with a strike of $60/bbl and matures in 6 months is closest to: a. b. c. d.
$5.50 $6.50 $7.50 $8.50
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Correct answer: d. Reason: This question relates two concepts—the put call parity and the relationship between the price of the physical commodity and its representation as a commodity futures contract. The spot price of a commodity, S(t), is widely considered as the most important indicator of future spot prices and such acts as the chief factor determining the shape of the futures price curve. At maturity, the price of the physical, underlying, commodity and the financial commodity future, F(t,T) should be equal to preclude arbitrage. Because of the equilibrium assumption, the convergence of physical and financial prices holds true, which at expiration at time (T) can be expressed as F(T, T) = S(T). Up to expiration, i.e., where t
Volatility. ______ You are trading in an electricity market, where the volatility of electricity generated by peakperiod, gas fired plants is 28% and increasing. What volatility would you then expect from electricity generated from baseload coal? For more practice questions and information for the ERP exam, please go to www.energyriskprofessional.com
a. b. c. d.
Greater than 28% Less than 28% Unknowable Equal to 28%
Correct answer: b. In all likelihood the baseload material used for electricity generation is coal (see below), and natural gas trades higher than coal. In this case, baseload coal is being used to provide a constant energy and natural gas is being used to supplement peak load energy demands. Of all the fossil fuels, coal is the most widely used. According to the EIA, during 2004, 50% of the nation’s electric power was generated at coal-fired plants. Based upon 2004 net generation shares by energy source, nuclear and natural gas are next in popularity after coal. While base load is constant and fairly predictable, electric utilities must be prepared at all times for the sometimes unpredictable demand seasonal weather changes cause. An increase in demand is referred to as peak load and intermediate load.
Managing credit-risk exposure. ______ Which of the following is NOT a method for managing credit-risk exposure within energy markets? a. b. c. d.
Clearing OTC energy derivatives Obtaining credit risk insurance Purchasing commodity futures Securing a financial guarantee via an Irrevocable Standby Letter of Credit
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4. 5. 6. 7.
credit insurance credit derivatives assignment clearing OTC energy derivatives.
The purchase of commodity futures is a hedging strategy.
Credit-risk hedging. ______ Emily Smith, ERP, manages the cost of jet fuel for a small charter airline company in the Northeastern United States. The company is struggling, and a significant consideration for the company is to hedge against anticipated increases in fuel costs in the coming six months. Due to the company’s poor financial standing—it has limited ability to raise cash and its credit lines are very close to being completely drawn down; Emily’s ability to reduce the impact of adverse price movements is largely limited. Given these constraints, which of the following alternatives could best mitigate the adverse effect of a significant increase in jet fuel prices? a. b. c. d.
Buy out of money call options on jet fuel Buy at the money call options on jet fuel Enter into a long jet fuel futures position Enter into a long jet fuel forward position
Correct answer: a. Reason: There are some companies whose credit risk is such that it is much easier for them to buy options rather than sell options. This is because the option buyer normally pays the upfront one or two business days after transacting, and thus poses a far lower credit risk than an option seller, who does not settle his obligations until maturity (or upon early exercise). Given smaller credit exposure, companies of lesser credit-standing can normally transact on equal with top credits when they are pure options buyers. With limited credit lines, futures and forwards (assuming they are margined) pose a potential collateral requirement in the future which would be a problem for the company in the example. Typical examples of companies using this kind of option strategy might be a privately owned shipping company which buys an OTC fuel oil cap as a hedge against an increase in bunker fuel prices, or a small charter airline that buys a jet fuel cap. Typically, these would settle in cash against the monthly average price of an appropriate index. For more practice questions and information for the ERP exam, please go to www.energyriskprofessional.com
In this scenario, an out-of-the-money call should be cheaper than an at-the-money call. On the other hand, it only protects against significant price movements, and even then only a small portion of the adverse movement’s negative effects will be offset. For a futures position, the cash outlay would be smaller for the option than the futures margin position, where collateral is required. To trade forward, you should need to post collateral or reduce counterparty credit risk for the other party.
Alternative energy risk. ______ Which of the following is NOT a main driver behind investments in alternative energy projects? a. b. c. d.
Labor disputes Oil and natural gas prices Tax incentives Public sentiment
Correct answer: a. Reason: The following items, while not comprehensive, serve as a good starting point for understanding alternative energy drivers: oil and natural gas prices; taxes, politics, and regulations; geopolitical environment; technological advancements; supply chain costs; and sentiment.
What are the most common alternative energy drivers (7)? ______ 1. 2. 3. 4. 5. 6. 7.
Oil and natural gas prices. Taxes. Politics and regulations. Geopolitical environment. Technological advancements. Supply chain costs. Sentiment.
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Spot price volatility. ______ The spot price volatility of WTI crude is 0.3, or 30%, and the spot price is $71.21. Assuming the return of WTI is normally distributed with zero drift, over the next year one can roughly expect the price of WTI to be (blank) 66% of the time. a. b. c. d.
$45.57 - $96.85 $49.85 - $94.18 $49.85 - $92.57 $45.57 - $94.96
Correct answer: c. Reason: Volatility roughly represents the percentage of the price range within which we can expect to see the prices 66% of the time. For example, if the spot price volatility is 0.1, or 10%, and if the spot price is currently $20, then over the next year we can-very roughly-expect the price to be within the $18 to $22 range 66% of the time. For this problem, $49.85 and $92.57 represent the plus/minus 30% volatility range off of $71.21.
FERC and EPA act. ______ The FERC and EPA Act of 2005 reasserts the Federal Energy Regulatory Commission’s roles in all of the following EXCEPT: a. b. c. d.
Supervising financial practices and corporate governance in energy markets ing the principle of competition in wholesale power markets Strengthening regulatory powers to ensure fair competition and avoid consumer exploitation Developing a stronger energy infrastructure
Correct answer: a.
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Reason: Supervising financial practices and corporate governance are powers granted under the Sarbanes-Oxley Act of 2002 and applies to all corporations and industries, not just those in energy markets.
When futures prices for short maturities in the crude oil market are more expensive than those maturing later, the market is … . ______ backwardated. F<S
Which are the five events and disputes that come up with a physical contract? ______ Events and disputes that may come up with a physical contract include: 1. 2. 3. 4. 5.
Force majeure Quality of the commodity being delivered Default on a debt Missed payments Missed deliveries
Credit ratings are not created in a contract but rather via third parties.
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How often does one have to file an updated application to maintain the position limit exemption for exposure associated with NYMEX? ______ Annually, not quarterly. Any person who has received from the Compliance Department written authorization to exceed position limits imposed under Rule 9A.27 (Expiration and Current Delivery Month Position Limits) must file with the Exchange an updated application annually not later than the anniversary date of the initial authorization, or waive the exemption.
A landman's responsibilities are ... . ______ strictly legal
According to the Securities Exchange Commission (SEC), how long must an ant maintain all audit review records after a review has concluded? ______ 5 years.
What is the main advantage of Monte Carlo simulations? ______ The advantages of Monte Carlo simulations include the ability to model evolution of risk factors over the holding period. Furthermore, there is no need to approximate portfolio values in this method—they are computed exactly. For more practice questions and information for the ERP exam, please go to www.energyriskprofessional.com
Hence, the method can be used for estimating VaR in nonlinear portfolios, which is a valuable characteristic for energy portfolios with assets. However, Monte Carlo simulation can be very expensive if many risk factors are being considered.
Futures can be used only to reduce the impact of ..., and they do not have any impact on ... . Futures can be used only to reduce the impact of ..., and they do not have any impact on ... .______ Futures can be used only to reduce the impact of price volatility, and they do not have any impact on the availability of a good. The producer is exposed to directional risk, i.e. the price of Brent crude, and basis risk, i.e. the s and discounts in the price formula. Consequently, by transacting futures he can only reduce the market risk, not the basis risk. Example: It is quite usual that crude oils extracted in West Africa are sold based on a formula indexed to Brent crude plus s and discounts, decided case by case on each cargo. If a West African producer is also executing futures on Brent, which type of risk is likely reduced? a. Basis risk and supply risk b. Basis risk and directional risk c. Supply risk d. Market risk Correct answer: d
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Describe gas basis. ______ Gas basis is the price difference between locations. Decentralization introduces geographic “basis risk,” which is unique to energies. In financial markets, today’s dollar is worth a dollar anywhere in the country. In energy markets, price depends on location. A megawatt of electricity is priced according to delivery point; the same holds true for natural gas. Location is a fundamental driver of price. Pilipovic defines “basis risk” as: The difference in prices between identical products but in two different markets.
Pilipovic defines “basis risk” as ... . ______ Basis risk is the difference in prices between identical products but in two different markets.
Which three methods can be used to evaluate crude oil for a refinery? What is important to consider? ______ 1. Break-even analysis 2. Crude oil replacement economics 3. Crude oil absolute economics Because crude oil value can vary more than USD 1–2/bbl, depending on the evaluation method, it is important to use an evaluation technique the closely resembles the method by which crude oil will be processed.
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EPAct gives the Commission [ civil / criminal ] penalty authority. EPAct gives the Commission [ civil / criminal ] penalty authority.______ EPAct gives the Commission civil penalty authority, which the Commission has indicated it will exercise carefully by assuring that its market manipulation rules are clear. This will make it easier for regulated entities to assure compliance, and make it easier for the Commission to identify violations.
Calculating load factor, example. ______ A generating plant has a nameplate rating of 650 megawatts and is expected to be offline for 720 hours for a scheduled outage during the year. A typical year has 8,760 hours. Actual generation during the year was 4,270,500 megawatt hours. What is the plant’s load factor? Correct answer: 75%. 4,270,500 MW / (650 MW x 8,760h) = 0.75. Load factor = actual generation / possible generation = average load / peak load. Scheduled outages are not reflected in the denominator.
What does SOX mandate for off-balance sheet transactions, what for derivative or hedging instruments? ______ SOX stipulates that each annual and quarterly financial report filed with the SOX Commission must disclose off-balance sheet transactions.
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Sarbanes-Oxley Act plays no role in establishing ing mechanisms for derivative or hedging instruments.
Can a forward be resold without the approval of one party? ______ No, both parties have to approve the sale. It is not purchased on an exchange.
Which are cheaper, gas turbines or steam turbines? ______ Gas turbines are cheaper than steam turbines. Steam turbines typically require boilers, boiler feed water makeup facilities, and steam condensers, which drives up their price.
Which contracts do LNG buyers generally prefer? ______ LNG buyers typically seek multiple smaller LNG contracts to diversify their supply sources and match the requirements of newly liberalizing and competitive LNG markets. In contrast, the trend with the Qatari mega-trains has been to have the sponsors emerge as the buyers for the entire train production and assume the risk of placing the LNG in the market.
What does an associated gas well and a non-associated gas well produce? ______ Associated gas well: Methane and crude oil. For more practice questions and information for the ERP exam, please go to www.energyriskprofessional.com
Non-associated gas well: Almost all pure methane.
What is the leading cause of dam failures? ______ Too much rain. Poor construction, failure of inspections, etc. are contributing causes, but dam failure almost always starts with heavy rains.
Describe the startup of the Oryx FT plant in Qatar. ______ The sheer size and complexity of an FT CTL plant brings additional risks. The unanticipated difficulties experienced by Sasol in starting up its FT GTL Oryx plant in Qatar are a case in point. A problem with the FT section of the plant seriously constrained initial operational capacity. Post-construction modifications required to correct this problem caused the plant start-up period, which normally requires a few months, to extend to at least 18 months during which “the Oryx t venture only generated a marginal cash contribution.” As Sasol reported, “our experience is that starting up technically complex and first-of-kind facilities takes time and is inherently problematic.”
Why do oil pipelines carry multiple products, and gas pipelines do not? ______ Oil goes through major transformation at refineries before it is suitable for consumptions by its various customers. Thus, oil products pipelines carry multiple products. Natural gas is transported “as is” from the wellhead all the way to consumers, with the exception of some minor processing at gas plants. Gas pipelines do not carry multiple products.
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How does zonal transmission handle constraints and redundancy? ______ Not well. Zonal transmission does not handle more local issues such as constraints and redundancy very well.
Where are energy forwards traded? ______ On the ICE. They are not standardized and not processed through clearinghouses.
For historical volatility that will be used in a GBM process, we need to ... (2). For historical volatility that will be used in a GBM process, we need to ... (2).______ For historical volatility that will be used in a GBM process, we need to: 1. calculate standard deviation of logarithmic price returns (ln S1/S0) 2. annualize the standard deviation by scaling it by the appropriate factor (√t)
What is the largest risk in geothermal power generation? ______ Geothermal drilling activity ceased in Switzerland, for example, when a geothermal drilling program was blamed for low-level earthquake activity. This risk can be fatal. Loss of reservoir water can be overcome by pumping down water, and nationalization is always a risk, but geothermal projects don’t seem to rank high on a government takeover list. Geothermal wells are 10-30 miles away from penetrating the earth’s crust. For more practice questions and information for the ERP exam, please go to www.energyriskprofessional.com
Example: The largest risk faced by geothermal power is: a. Loss of reservoir water causing steam generation to diminish. b. Inducing earthquakes. c. Underground energy sources expropriated by a government. d. Starting a volcanic eruption through the geothermal drill hole. Correct answer: b.
Geothermal wells are ... miles away from penetrating the earth’s crust. Geothermal wells are ... miles away from penetrating the earth’s crust.______ Geothermal wells are 10-30 miles away from penetrating the earth’s crust.
Explain a countertrade. ______ Countertrade means exchanging goods or services which are paid for, in whole or part, with other goods or services, rather than with money. A monetary valuation can however be used in counter trade for ing purposes. If there is a netting agreement, a countertrade reduces settlement risk of sold forward contracts and locks actual replacement risk. Since the countertrade is concluded at the actual market price and the replacement risk cannot be reduced.
What are the effects of a countertrade (2)? ______
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If there is a netting agreement, a countertrade: 1. reduces settlement risk of sold forward contracts and 2. locks actual replacement risk. Countertrade means exchanging goods or services which are paid for, in whole or part, with other goods or services, rather than with money.
What were the goals (3) of the FERC Standards of Conduct for Transmission Providers? ______ The vast majority agreed with the Commission’s goals of simplifying the Standards in order to achieve: 1. Greater clarity 2. Greater efficiencies of operation 3. Greater ease of compliance The Commission therefore adopts the employee functional approach, as set forth in the regulatory text, and eliminates the concept of energy s.
Does the lognormal distribution represent the size distribution of small fields well? ______ No.
Which standard requires disclosure of the fair values of derivative instruments and their gains and losses in a tabular format? ______ For more practice questions and information for the ERP exam, please go to www.energyriskprofessional.com
FASB Statement No. 161, not Sarbanes-Oxley, requires disclosure of the fair values of derivative instruments and their gains and losses in a tabular format.
Which is the most sophisticated emissions trading market? Which commodity is traded? ______ The sulfur dioxide (SO2) emissions-trading market is the most sophisticated emissions-trading market in the world and one of the oldest. The SO 2 market is also the most liquid of all environmental markets. SO2 has been actively traded daily in spot and forward markets since the inception of the market and can now be traded on regulated futures markets. The annual value of SO2 trades is USD 3billion.
Describe a royalty on an LNG project. ______ Typically speaking, in the upstream, royalties are a common device by which governments can secure a share of a project's revenue. High royalties can be onerous to an LNG project, since they involve a payment to the sovereign made directly out of the sales revenues irrespective of the project’s actual earnings. These royalties can be on oil and/or gas; in the case of an LNG project, any liquids produced are often subject to the same royalties as oil production. Royalties are usually expressed as a percentage of initial revenue. For current LNG projects, they generally fall in a range of 5%–20%. Less commonly, they can be calculated as a fixed unit cost (USD /MMBtu).
Calculate net exposures in hedging, example. ______ Virgin Oil is a crude oil producer willing to hedge 100% of its future production along the next calendar year. In order to achieve this objective, it sells a swap on Brent crude for 1 million barrels at USD 60/bbl. Later the company discovers that the real production will be 20% lower than estimated. Bank “A” offers to buy from Virgin Oil swaps Brent crude for 200,000 barrels, at a price of USD 50/bbl. Bank “B” offers to buy from Virgin Oil swaps Brent crude for 500,000 For more practice questions and information for the ERP exam, please go to www.energyriskprofessional.com
barrels at a price of USD 53/bbl. Put in order the following four different options, from the least to the riskiest: I. Doing nothing. II. Accept the offer from bank “A.” III. Accept the offer from bank “B.” IV. Unwind everything. a. II, III, IV, I b. II, I, III, IV c. III, IV, II, I d. I, III, II, IV Solution: B. The net resulting exposure of the four options are: I (-200,000 bbls), II (0 bbls), III (+300,000 bbls), IV (800,000 bbls).
Measurement of natural gas, example. ______ The English unit of volume measurement for natural gas is a cubic foot (ft3). Because gas expands/contracts with pressure and temperature changes, the measurement is made under or is converted to standard conditions which is: a. The way it has been done since natural gas was first used as a commodity. b. The correct way to do it. c. Defined by law. d. Defined by the industry. Correct answer: c. The English unit of volume measurement for natural gas is a cubic foot (cf). Because gas expands/contracts with pressure and temperature changes, the measurement is made under or is converted to standard conditions defined by law. It is usually 60°F and 14.65 psi (15°C and 101.325 kPa) and is called standard cubic feet (scf). The abbreviation for 1000 cubic feet is Mcf, a million cubic feet is MMcf, a billion cubic feet is For more practice questions and information for the ERP exam, please go to www.energyriskprofessional.com
Bcf and a trillion cubic feet is Tcf. Condensate content is measured in barrels per million cubic feet of gas.
Describe standard cf. What is the convention? ______ Because gas expands/contracts with pressure and temperature changes, the measurement is made under or is converted to standard conditions defined by law. The convention of standard cubic feet (scf) is usually:
60°F (15°C) 14.65 psi (101.325 kPa)
What causes a volatility smile? ______ The reason there is such a thing as a volatility “smile” (or “frown” as the case may be) is that differing Black-implied volatilities for options with same specifications but different strikes are necessary to capture the true underlying price behavior and therefore traded option prices. Black option pricing model assumes log-normal price behavior for the underlying forward prices, which generally does not capture the full spectrum of behavior of energy prices given a single volatility measure.
Time series analysis is necessary for ... , distribution analysis is important in ... . ______ Time series analysis is necessary for calibrating model parameters.
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Distribution analysis is important in comparing long-term price behavior to model-implied behavior.
What is instantaneous volatility? ______ Instantaneous volatility = historical volatility
Describe capital costs for an FT CTL plant. ______ Capital costs are defined as all outlays made after the decision to construct a commercial plant and prior to the production of salable products. Capital costs, as defined in this approach, do not include factors to for either inflation or interest accrued during construction. The effects of interest payments during construction are ed for in the discounted-cash-flow calculations. For an FT CTL plant, our capital costs do not include investments associated with developing the mine or mines that will supply coal to the plant. Instead, we assume that coal will be purchased via long-term contracts at prices that for the costs associated with developing and operating a coal mine.
Which criterium is most often used to asses the fair price of a pipeline? ______ Economic value. There are various ways of calculating economic value. Together they are the criteria most often used to establish the seller’s bottom acceptable price and the purchaser’s maximum purchase price. Existing pipelines have a history of return. Potential purchasers may base the price they are willing to pay on forecasts of volumes, rates, and expenses based on history. The forecasts are used to develop a future stream of cash flows. These are then discounted to arrive at a value, called net present value (NPV). For more practice questions and information for the ERP exam, please go to www.energyriskprofessional.com
PUC, example. ______ Which of the following statements regarding public utility commissions (PUCs) is NOT true? a. All states have PUCs to govern actions of state regulated utilities. b. PUCs are considered quasi-judicial and quasi-legislative entities. c. PUCs hold hearings to fix rates that may be charged by utilities, but may not investigate service related issues. d. PUCs hold hearings to fix rates that may be charged by utilities. Correct answer: C. PUCs are considered to be quasi-judicial and quasi-legislative entities. There is no real separation of power, since they act as , judge, and legislator . Commissions act as when, for instance, they investigate rates or service. In a judicial capacity, PUCs exercise this power when they hold hearings, examine evidence, and make final determinations of a particular utility’s conduct.
What is the most glaring flaw of the Hubbert theory of decline? ______ One glaring issue with Hubbert’s model is that it makes time the only explanatory variable for the production of a region, thereby disallowing the possibility of reserves being created as a result technical progress. Around 1960, King Hubbert, then an engineer at Shell, forecast, by fitting a normal curve to the production profile of 48 American states, that production would reach its peak in 1969. Production would then decline in a manner symmetrical to the growth phase. The fact that his theory was vindicated for one particular example does not mean, however, that his model has been validated generally. Even if, in several regions of the world, production profiles are found to be distributed normally, there is no reason to believe that all production profiles will display a normally distributed pattern.
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However attempts have been made to explain or justify the Hubbert phenomenon “mathematically.” One such attempt appeals to one of the most celebrated theorems of probability theory: the central limit theorem. This states that under certain regularity hypotheses the sum of a large number of independent random phenomena (even if highly asymmetric or multimodal) tends to produce a random variable with a normal distribution, that is, symmetrical with a bell-shaped distribution, like that used in the Hubbert approach. But the probability density of the sum is not equal to the sum of the probability density (in this case the production profiles of the fields). Furthermore the Hubbert phenomenon does not fall within the scope of this theorem. In the first place the production profiles summed are obviously not independent of one another, particularly when they relate to the same geographical zone, and secondly the theorem relates to numerical distributions rather than temporal distributions, as in Hubbert’s model. Temporal distributions are subject to a completely different tool of probability theory, namely time series analysis. Great care must therefore be taken not to misuse this method which, however appealing it may seem on the basis of a few examples, has no scientific basis. If certain aggregated profiles exhibit the characteristics of the normal distribution, these are curiosities, the real reason for which it would be very interesting to explore, rather than a phenomenon of general applicability as claimed by Hubbert and his numerous followers. Hubbert himself ended up by repudiating the normal curve in favor of the logistic curve which unfortunately is no more justified than the normal curve.
Explain Section 409 of Sarbanes-Oxley. Section 409 of Sarbanes-Oxley.______ According to Section 409 of Sarbanes-Oxley, Real Time Issuer Disclosures: Each issuer reporting under section 13(a) or 15(d) shall disclose to the public on a rapid and current basis such additional information concerning material changes in the financial condition or operations of the issuer, in plain English, which may include trend and qualitative information and graphic presentations, as the Commission determines, by rule, is necessary or useful for the protection of investors and in the public interest.
Calculating value of options positions, example. ______ Assume you hold a short put position with a strike price of EUR 40 and a long call position with a strike price of EUR 40. At expiration, the spot price of the asset is EUR 50. What is the value of your combined positions? For more practice questions and information for the ERP exam, please go to www.energyriskprofessional.com
Correct answer: The payoff from the short put is -max[K-S,0] = -max[40-50,0] = 0. The payoff for the long call is max[S-K,0] = max[50-40,0] = EUR 10. The sum is EUR 10.
Which options imply higher Black-equivalent volatilities, daily or monthly-settled options? ______ Daily settled options imply generally much higher Black-equivalent volatilities than do monthlysettled options for the same month of delivery. This is due to several factors. The fact that monthly settled options are options on an average of daily forward prices that tend to exhibit non-perfect correlations allows for averaging effects which diminish the effective volatility of the average relative to the daily-settled volatility. Also, since daily settled volatilities settle into next day delivery, the daily option volatilities get the benefit of riding up the steep volatility curve all the way to the day of delivery, whereas monthly-settled options do not get this benefit as they expire prior to the first day of delivery in the month.
How are monthly settled options and daily settled options related? ______ Monthly settled options are options on an average of daily forward prices that tend to exhibit non-perfect correlations allows for averaging effects which diminish the effective volatility of the average relative to the daily-settled volatility.
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Does the comparable sales method work well to assess the market value of a pipeline? ______ No. Establishing value based on sales of similar items works well where similar assets, like houses, are sold every year, thus establishing a market value. It does not work well for pipelines. Too many adjustments are needed to arrive at an appropriate value—age, throughput, and the supply/demand outlook for the commodities being transported. Buyers and sellers may use similar sales as indicators to help them understand the range of values. However, this valuation method normally only complements the economic value method in pipeline sales.
Calculate the spark spread, example. ______ We assume that the heat rate of a natural gas peaking unit is 10,000 Btu/kWh. The price of electricity is USD 25.00 per MWh, and the price of natural gas is USD 2.00. What is the spark spread in USD per kWh? Correct answer: USD 0.005/kWh. Output price: USD 25/MWh = USD 25/1,000 kWh = USD 0.025/kWh. Input price: 10,000 Btu/kWh x USD 2.00/MmBtu = 10,000 Btu/kWh x USD 2.00/1,000,000 Btu = USD 2.00/100kWh= USD 0.02/kWh. The spark spread is therefore USD 0.005/kWh.
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How can VaR be adjusted for extreme events? ______ With stress testing.
ing for futures, example. ______ During the entire period of a contract, the contract holder must: a. Report revenues to the Commodities Futures Trading Commission. b. Must not keep separate s for tax purposes. c. Keep separate s in accordance with ing procedures appended to the contract. d. Notify local governing bodies (e.g. city council) that a contract has been made. Correct answer: C. During the entire period of validity of the contract, the contract holder must keep separate s in accordance with ing procedures appended to the contract. These procedures are set up in accordance with the rules applying in the country concerned, but may be subjected to slight changes to allow them to cater for specific petroleum mechanisms, for example depreciation procedures, the period of carry-forward of losses and the definition of petroleum costs. The clause in the main agreement relating to the s of the contract holder can therefore be quite short because it will refer to the ing procedure in which all the practical procedures are indicated. It will specify the currency in which s are to be kept (often U.S. dollars), rules for conversion and the right of the government to have the s audited.
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The Federal Energy Regulatory Commission (FERC) is responsible for the interstate transmission of ... (4). ______ 1. 2. 3. 4.
Electricity Natural gas Oil Licensing and inspecting LNG projects
The Federal Energy Regulatory Commission, or FERC, is an independent agency in the United States that regulates the interstate transmission of natural gas, oil, and electricity. FERC also regulates natural gas and hydropower projects.
What is used to assess whether to record a financial gain or loss for a sale of a pipeline? ______ Book value is used by sellers to allow them to understand if they need to record a financial gain or loss for the sale of pipelines. It is not particularly useful for purchasers, since book value has little relevance to what the asset is currently worth. Sometimes it is used to reallocate ownership between t venture partners if the venture was set to provide for this approach.
Tank size = ... (formula). ______ Tank size = (Average daily demand x Cycle time) + Safety stock + Tank bottoms + Safe fill allowance
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Calculating capacity requirement, example. ______ An electric market uses a capacity market to promote the building of new capacity. Given the following information, how much capacity (MWs) would an end-use customer be required to purchase? Expected end- peak load: 100 MW Average end- load: 90 MW Percentage reserve margin: 10% a. 10 MW b. 110 MW c. 100 MW d. 99 MW
Correct answer: b. Capacity requirement = peak load time x (1+ reserve margin %).
Capacity requirement = ... (formula). ______ Capacity requirement = peak load time x (1 + reserve margin %)
Which specifications for the quality of the gas from an LNG terminal must a supplier of LNG fulfill? ______ The quality of the gas that comes from an LNG import terminal must be consistent with the requirements of downstream gas customers or meet the specifications of the interconnected gas transmission lines, which vary by region and by country. For more practice questions and information for the ERP exam, please go to www.energyriskprofessional.com
For example, receiving facilities located close to producing regions may be permitted to accept LNG with wide-ranging and fairly high calorific values. The Lake Charles, LN, receiving terminal can import lean LNG from places such as Trinidad, as well as rich LNG from Australia and Qatar. This is because the regasified LNG immediately mingles downstream from the terminal with gas production from the Gulf of Mexico and is often treated in NGL-processing plants before being sent on to market. But LNG import terminals that are located in market areas or that serve buyers with specific gas quality restrictions must closely monitor and, where necessary, adjust the quality of the regasified LNG that is delivered into the local grid.
How are underground storage salt caverns formed (2)? ______ 1. Dissolving with fresh water (leaching) 2. Hard rock mining Underground gas storage caverns can be constructed by leaching with fresh water, as is common in the U.S. Gulf Coast, or via hard rock mining, as popular in the Eastern U.S. and in parts of Europe.
As the complexity of the refinery increases the gasoline yield [ increases / decreases ] and the residual fuel yield [ increases / decreases ]. ______ As the complexity of the refinery increases
the gasoline yield increases and
the residual fuel yield decreases (the residual fuel stream is being converted to gasoline).
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Vega for puts and calls with the same strike are ... . ______ Vegas for puts and calls with the same strike are the same. This follows from the put call parity relation, X + c = S + p.
Describe the functions of an RTO (2). ______ Regional transmission organizations (RTO) help improve transmission to overcome locational issues For example, RTOs have coordinated planning for logical transmission expansion.
On-peak options. ______ You are concerned with high electricity prices for the month. Monthly on-peak options are available at USD 75 per megawatt for a 100 MW contract. If you purchase a monthly on-peak power option contract, how many megawatt hours will you receive, assuming there are 20 business days per month? a. 32,000 mWh b. 48,000 mWh c. 16,000 mWh d. 2,000 mWh Correct answer: A. 16 hours per day times 20 days, times 100 MWs = 32,000. b is incorrect, since calculations assume 24 hours per day. c is incorrect, since calculation assumes 8 on-peak hours per day. d is incorrect, since calculation assumes zero hours during the day. For more practice questions and information for the ERP exam, please go to www.energyriskprofessional.com
Describe the volatility used in the Ornstein-Uhlenbeck process. ______ The volatility for the Ornstein-Uhlenbeck process has units of dollars. The volatilities in BlackScholes and Ornstein-Uhlenbeck are not interchangeable. Volatility has to be estimated in the context of the stochastic process assumption. The volatility for an Ornstein-Uhlenbeck process has different units to that which is used in the Black-Scholes model. The Ornstein–Uhlenbeck process is also known as the mean-reverting process, is a stochastic process. The process is one of several approaches used to model (with modifications) interest rates, currency exchange rates, and commodity prices stochastically. The parameter μ represents the equilibrium or mean value ed by fundamentals; σ the degree of volatility around it caused by shocks, and θ the rate by which these shocks dissipate and the variable reverts towards the mean. One application of the process is a trading strategy pairs trade. The Ornstein–Uhlenbeck process is a prototype of a noisy relaxation process.
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