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2016 Energy Risk Professional (ERP) Learning Objectives

2016 Global Association of Risk Professionals. All rights reserved2

*An asterisk (*) before a reading title indicates that the reading is freely available on the GARP website

THE ENERGY RISK PROFESSIONAL (ERP) EXAMINATION

The 2016 ERP Exam has been redesigned to better accommodate

the needs of candidates who strive to achieve the designation. The

volume and diversity of content necessary to comprehensively assess

knowledge of the energy markets has grown in recent years, making it

increasingly challenging for candidates to prepare for a single, 8-hour

exam. Beginning in 2016, we are introducing a new 2-part exam structure

that provides candidates the flexibility to complete the ERP in one or two

separate exam cycles.

The 2-part ERP Exam is designed to assess knowledge of the physical

energy commodity and electricity markets, trading and structuring of

financial energy contracts, and the tools required to identify, measure,

and manage risk across the energy value chain.

The ERP curriculum is guided by GARPs Energy Oversight Committee

(EOC) comprised of senior practitioners and academics with diverse

backgrounds from across the energy industry.

2016 ERP EXAM LEARNING OBJECTIVES

The learning objectives highlight the detailed knowledge points that

candidates are expected to understand and apply for each of the

readings summarized in the ERP Study Guide. Each exam question is

developed from and directly references a specific learning objective.


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2016 Energy Risk Professional (ERP) Learning Objective

2016 Global Association of Risk Professionals. All rights reserved.

*An asterisk (*) before a reading title indicates that the reading is freely available on the GARP website.

EXAM STRUCTURE

The distribution of questions for each section of the 2016 ERP Exams is summarized

below. The weights were chosen in conjunction with the EOC to create a balanced

curriculum that reflects the relative importance of topics and functions across the

energy value chain.

The ERP Part I exam is a 4-hour exam consisting of 80 multiple choice questions

drawn from the following physical energy market topics:

Introduction to Energy Commodities and Risk Management 10% 8 questions

Crude Oil Markets and Refined Products 35% 28 questions

Natural Gas and Coal Markets 25% 20 questions

Electricity Markets and Renewable Generation 30% 24 questions

ERP Exam Part I Total 100% 80 questions

The ERP Exam Part II is a 4-hour exam consisting of 60 multiple choice questions

drawn from the following financial energy market and risk management topics:

Price Formation in Energy Markets 15% 9 questions

Financial Energy Products 25% 15 questions

Risk Management Tools 60% 36 questions

ERP Exam Part II Total 100% 60 questions

COMMONLY-USED CONTRACT SPECIFICATIONS

Exchange-traded energy commodity futures and options contracts are typically

transacted in standardized lot sizes. Unless otherwise noted, exam questions will

assume the following standard volumetric terms:

Crude Oil: 1,000 barrels (equal to 42,000 gallons) per contract

Gasoline Futures: 42,000 gallons per contract

ULSD Futures: 42,000 gallons per contract

Gasoil (Diesel) Futures: 100 Metric Tons (MT) per contract

Natural Gas (Henry Hub) Futures: 10,000 MMBtu per contract

Coal: 1,000 MT per contract


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Bbl: Barrel of

BOE: Barrel of Oil Equivalent

CCP: Central Counterparty

CDD: Cooling Degree Days

Cf: Cubic Feet

CFD: Contract for Differences

CIF: Cargo, Insurance, Freight

CRO: Chief Risk Officer

CSA: Credit Support Annex

CVA: Credit Value Adjustment

DA: Day-Ahead

DAP: Delivered at Place

DDP: Delivered Duty Paid

DDU: Delivered Duty Unpaid

E&P: Exploration and Production

EFP: Exchange for Physicals

ERM: Enterprise Risk Management

EWMA: Exponentially Weighted Moving Average

FAS: Free Alongside Ship

FOB: Free on Board

FTR: Financial Transmission Right

GARCH: Generalized AutoRegressive Conditional

Heteroskedasticity

HDD: Heating Degree Days ICE: Intercontinental Exchange

IOC: Independent Oil Company

IRR: Internal Rate of Return

ISDA: International Swaps and Derivatives Association

ISO: Independent System Operator

KPI: Key Performance Indicators

KRI: Key Risk Indicators

kW: Kilowatt

kWh: Kilowatt Hour

LMP: Locational Marginal Pricing

LNG: Liquefied Natural Gas

MCf: Million Cubic Feet

MMBtu: One Million British Thermal Units

MT: Metric Ton

MtM: Mark-to-Market

MW: Megawatt

MWh: Megawatt Hour

NGL: Natural Gas Liquid

NOC: National Oil Company

NPV: Net Present Value

NYH: New York Harbor

NYMEX: New York Mercantile Exchange

OPEC: Organization of the Petroleum Exporting

Countries

OTC: Over-the-Counter

PADD: Petroleum Allocation for Defense District

PFE: Potential Future Exposure

PV: Photovoltaic

PSC: Production Services Contract

RBOB: Reformulated Blendstock for Oxygenate

Blending

RFS: Renewable Fuel Standard

RIN: Renewable Identification Number

RTO: Regional Transmission Organization

RVO: Renewable Volume Obligation

ULSD: Ultra-low Sulfur Diesel

USGC: United States Gulf Coast

VaR: Value-at-Risk

VPP: Volumetric Production Payment

WACC: Weighted Average Cost of Capital WTI: West Texas Intermediate Crude Oil

COMMONLY-USED ABBREVIATIONS AND ACRONYMS

The following is a list of commonly used abbreviations and acronyms that may appear on the exam:


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LEARNING OBJECTIVES

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INTRODUCTION TO ENERGY COMMODITIES AND RISK MANAGEMENT PART I EXAM WEIGHT | 10%

Introduction to Physical Energy Commodity Markets

Linking Physical and Financial Energy Markets

Forward contracts and carry

Market liquidity

Risk Management Overview

The risk management process

Basic types of risk

LEARNING OBJECTIVES FOR INTRODUCTION TO ENERGY COMMODITIES AND RISK MANAGEMENT | 8 QUESTIONS

Glen Swindle. Valuation and Risk Management in Energy Markets. (New York: Cambridge University Press, 2014).

Chapter 1 Context

Describe the unique characteristics of energy that differentiate it from other asset classes.

Define calendar strips (cal strip) and seasonal strips and understand their practical application.

Explain the impact of volatility on collateral postings, credit exposures, and capital requirements on energy

commodity trading operations.

Identify the benchmark NYMEX natural gas delivery location, and explain why natural gas forward curves exhibit

seasonal variations in demand.

Define basis and understand the primary drivers of basis differentials.

Identify the global and North American benchmark contracts across energy commodities.

Understand the relationship between locational spreads, benchmarks, hubs, and liquidity.

Chapter 2 Forwards and Carry

Summarize the variety of derivative instruments available for hedging and risk transfer activities.

Identify the abbreviations/identifiers for commodities futures contracts for each calendar month.

Compare the characteristics of physically delivered vs. financially settled transactions.

Define lot and open interest and explain the dynamics of NYMEX WTI futures contract expiration.

Explain the mechanics of an Exchange-for-Physical (EFP) transaction.

Define and distinguish contango, backwardation, and convenience yield.

Describe the economics of a park-and-loan deal structure.

Chapter 3 Macro Perspective

Understand the seasonality inherent in various energy commodity markets and explain factors that impact

seasonality.

Explain how gas storage facilities, injection, and withdrawal factor into the concept of seasonality.

Define and interpret the crack spread for various refined products.

Describe how deregulation and technological innovations such as hydraulic fracturing (fracking) have evolved

the natural gas markets.

Understand the fundamental market dynamics of the most commonly traded natural gas spreads. Describe the relationship between US natural gas prices relative to world benchmark spot prices.


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Michel Crouhy, Dan Galai, and Robert Mark. The Essentials of Risk Management, 2nd Edition. (McGraw-Hill

Education, 2014).

Chapter 1 Risk Management: A Helicopter View

Appendix 1.1 Typology of Risk Exposures

Explain the concept of risk and compare risk management with risk taking.

Describe the risk management process and identify problems and challenges which can arise in the risk

management process.

Evaluate and apply tools and procedures used to measure and manage risk, including quantitative measures,qualitative assessment, and enterprise risk management.

Describe and differentiate between the key classes of risks, explain how each type of risk can arise, and assess the

potential impact of each type of risk on an organization.


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CRUDE OIL MARKETS AND REFINED PRODUCTS PART I EXAM WEIGHT | 35%

Exploration, Production, and Project Development

Proved, possible and probable reserves

Barrel of Oil Equivalent

Contractual and concessionary systems

Production sharing agreements Lease provisions including royalty payments

Economic valuation of oil/gas projects

Upstream economics including: wellhead price, break-even price and tax allocations

Partnership arrangements and the allocation of working interests

Real Options valuation analysis

Petroleum Refining

Refinery complexity

Refining margins and price formation

Crack spread

Specifications and requirements

Finished products and pricing

Renewable Identification Numbers (RINs)Global Benchmarks and Price Formation

Grades of crude oil

Brent, WTI, Dubai-Oman

Oil trading related to benchmark pricing

Crude Oil Transportation and Storage

Pipeline, seaborne, and rail economics

Worldscale and Incoterms

Creating and regulating a safety culture

Unconventional Oil

Unconventional resources defined

Conventional vs. unconventional project economics

LEARNING OBJECTIVES FOR CRUDE OIL MARKETS AND REFINED PRODUCTS | 28 QUESTIONS

Andrew Inkpen and Michael H. Moffett. The Global Oil and Gas Industry: Management, Strategy and Finance.

(Tulsa, Oklahoma: PennWell Books, 2011).

Chapter 3 Access, Leasing, and Exploration

Define the core activities in the upstream oil and gas value chain.

Summarize the process of accessing new reserves and outline the steps involved in developing a petroleum

project.

Understand subsurface oil and gas geological structures and how they affect project development.

Identify the owner of subsurface mineral and resource rights based on jurisdiction and market assumptions.

Compare and contrast the fiscal regimes of international petroleum agreements.

Describe the typical components of a lease agreement and methods to establish royalty payments.

Describe oil-in-place and explain the resource classification framework for reserves.

Compare and contrast the features and economic factors associated with various categories of reserves (proved,

developed, undeveloped, probable, possible, P90, etc).

Define and calculate reserve replacement and reserve life given a set of market assumptions.


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Chapter 4 Developing Oil and Gas Projects

Understand and apply the concept of unitization in the development of Joint Development Zones.

Assess the financial viability of a project using Net Present Value (NPV), Internal Rate of Return (IRR), and other

available financial metrics.

Calculate and interpret the Weighted Average Cost of Capital (WACC) for a company.

Classify pre-completion, post completion and macroeconomic risks and explain their impact on project

development decisions.

Summarize the key challenges, failures, or risks associated with the various case studies provided.

Chapter 5 Production of Oil and Gas Products

Identify and describe the broad categories of upstream costs, and understand how specific costs impact an energy

companys earnings.

Explain why crude oil production costs vary by location and demonstrate how production costs can create a

competitive advantage for a specific crude oil field.

Assess the economic performance of an oil well, including: operating profitability, break-even price, working

interest and tax allocations.

Classify and describe the costs and factors associated with the enhancement and ongoing production of an oil

field, with particular focus on primary, secondary and tertiary recovery methods.

Assess terms of a partnership management agreement; determine how duties are shared and disputes settled

within the framework of the arrangement. Understand the nature of relationships, incentives, and potential conflicts among various stakeholders along the oi

and gas supply chain.

Identify and assess political risks that impact crude oil production decisions.

Chapter 6 Fiscal Regimes

Differentiate between the various fiscal regimes used in hydrocarbon production contracts and understand how

the ownership of subsurface minerals relates to the type of regime applied.

Calculate the cashflow for a petroleum company under a royalty/tax financial system and a production sharing

agreement.

Interpret the use of secondary contractual features like signature bonuses, and identify the circumstances in which

they are used.

Assess the financial viability of a hydrocarbon project based on production volumes and petroleum prices.

Demonstrate how the mineral rights for oil and gas fields are applied using the sub-Saharan case study as an

example.

Chapter 10 The Market for Crude Oil

Understand how crude oil pricing has evolved in recent decades due to market and political forces.

Identify the various physical properties of crude oil and the impact they have on market pricing.

Understand the role of benchmark prices in the global crude oil market and demonstrate how the price of a

specific crude oil stream is linked to benchmark crude oils.

Distinguish between spot, futures and contract transactions in the crude oil markets.

Understand the factors that affect the valuation of a crude oil futures contract; perform a valuation of crude oil

futures contract given a set of market assumptions.


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Chapter 12 Refining

Compare and contrast the operational and economic differences between independent refiners and integrated oil

companies.

Describe the refining process and identify the end-products typically produced.

Define and explain the various physical processes related to crude oil refining.

Describe how a refinerys complexity affects its choice of crude oil feedstock and the optimal product mix it will

produce; interpret the Nelson Complexity Index.

Assess the economics of refinery operations including the relationship between the cost of crude oil and refinerymargins and the impact of a refinerys complexity on its product mix and profit margin.

Define crack spread and interpret results of a crack spread calculation using given input and output prices.

Understand how factors like location, technology, environmental mandates, capacity utilization, scheduling, and

refinery complexity/efficiency impact refining economics.

*An Introduction to Petroleum Refining and the Production of Ultra Low Sulfur Gasoline and Diesel Fuel. The

International Council on Clean Transportation. MathPro (Oct 2011).

Summarize the fundamentals and primary economic objectives of petroleum refining, processing and production.

Explain the key characteristics that determine a refinerys product yield.

Interpret the carbon-to-hydrogen (C/H) ratio in refinery processing.

Understand the interaction between the seven primary classes or steps within the refining process.

Identify the steps associated with petroleum cracking, upgrading, and blending. Define the key blending properties of standard gasoline and diesel blendstocks.

Describe petroleum refining processes used to reduce the sulfur content of gasoline.

Summarize the factors that determine the refining cost of ULSD.

*What Drives US Gasoline Prices?US Energy Information Administration (Oct 2014). (Pages 1 20 only).

Explain how a potential relaxation of the current limitations on US crude oil exports could impact both US

domestic and international crude oil prices.

Interpret the relationship between US spot gasoline prices and global crude oil benchmarks.

Summarize the four elements that generally determine US retail gasoline prices.

Explain how a change in the price of crude oil is reflected in retail gasoline prices.

Understand the market dynamics that impact the Brent / WTI spread.

Identify the primary global spot markets for gasoline and determinants of relative value across locations.

Explain the relative magnitude of price movements and correlation across global gasoline trading hubs.

*Michael D. Plante and Mine Yucel. Renewable Fuel Standards Hit the Blend Wall.Federal Reserve Bank of Dallas

Economic Letter (March 2014).

Summarize the key policy objectives of the Renewable Fuel Standards (RFS) and understand the costs and

benefits of the RFS mandates.

Define RINs and interpret the lifecycle of a RIN.

Define the blend wall and understand how it applies to ethanol mandates.

Identify the various types of biofuels that meet RFS mandates and identify the potential challenges associated with

implementing the biofuels mandate system.

Define RVO and understand how it impacts physical blending economics.

Identify the potential factors that caused high volatility in the RIN market in 2013.


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2016 Global Association of Risk Professionals. All rights reserved. 1


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

PennWell Books, 2008).

Chapter 15 Accounting for International Petroleum Operations

Differentiate the characteristics of various fiscal systems used in global petroleum contracts including:

concessionary, contractual, and production sharing/service agreements.

Calculate the economic revenue generated from various global petroleum contracts, given a set of inputs.

Understand how profit oil impacts project economics.

Illustrate the application of a joint operating agreement and the circumstances when it is used. Identify accounting regulations that can affect international petroleum contracts.

Betty J. Simkins and Russell E. Simkins, eds. Energy Finance and Economics: Analysis and Valuation, Risk

Management, and the Future of Energy. (Hoboken, New Jersey: John Wiley & Sons 2013).

Chapter 11 Real Options and Applications in the Energy Industry

Define different types of real options (option to expand, option to exercise, etc.) and identify the circumstances in

which each may be employed.

Understand the valuation of real options and assess a real option on a hypothetical project.

Describe how Black-Scholes, binomial trees, and Monte Carlo simulations are used to value real options; identify

the challenges associated with each approach.

Vincent Kaminski. Energy Markets. (London, UK: Risk Books, 2012).Chapter 16 Oil Transportation and Storage

Describe different classes of oil tankers; understand the transport limitations (e.g., typical route and cargo

specification) for each class of tanker.

Identify the common types of charter contracts used for crude oil shipments.

Calculate the cost of transporting a shipment of oil using the Worldscale pricing system.

Understand the relative economics associated with the various methods available to transport crude oil; for

example: pipeline, rail, tanker, and other methods.

Understand how pipeline shipment times and unexpected disruptions in shipments can impact commodity traders

and oil consumers.

Summarize the characteristics of different types of crude oil storage facilities and explain how storage level reports

are generated.

Summarize the primary petroleum inventory storage reports used in the United States and internationally,

including the JODI framework, and understand their impact on the petroleum markets.

Chapter 17 Oil Pricing

Calculate royalty and tax payments associated with a typical petroleum contract using a given set of contractual

terms.

Explain the physical and financial characteristics of Brent oil, the role of dated Brent, Brent complex, and the use of

Contracts for Differences (CFDs) in trading Brent.

Understand the impact pipeline constraints can have on WTI pricing and the use of the P-plus price.

Identify market factors that can cause benchmark crude oil prices to diverge from each other; use the historical

relationship between WTI/Brent and WTI/LLS as a basis.

Understand the market factors that prompted the emergence of the Dubai-Oman benchmark and discuss the

issues associated with its adoption and operation.

*Guide to the Incoterms 2010 Rules & Reference Chart. International Chamber of Commerce (2010).

Differentiate between the common types of charter contracts used for waterborne shipments and understand the

economics associated with each including: FOB, CIF, DAP, and DDP, etc.

Understand each partys obligations, risks, costs, and ownership rights associated with the various types of

contract structures.


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*Transporting Crude Oil by Rail in Canada. Canadian Association of Petroleum Producers (March 2014).

Understand the market economics driving the rapid increase in crude-by-rail shipments across North America,

including the relative geographic location of crude oil production and refining facilities.

Compare the different requirements for transporting light crude oil, heavy crude oil, and bitumen.

Identify the additional steps necessary to transport heavier grades of crude oil and why rail transport can be a

better alternative to pipelines.

Explain the operational risks associated with crude-by-rail transport and how recent accidents have prompted new

safety requirements.

*Moving Energy Safely: A Study of the Safe Transport of Hydrocarbons by Pipelines, Tankers and Railcars in

Canada. Canadian Senate Committee on Energy, the Environment and Natural Resources (Aug 2013).

Define a safety culture and describe best practices for an energy firm in maintaining a strong safety culture.

Describe techniques and design features that help manage and mitigate the risk of pipeline accidents.

Describe procedures and design features that help mitigate the risk of oil spills during tanker transport.

Describe practices and procedures designed to reduce the incidence of crude by rail accidents.

Explain preparedness and response techniques to respond to pipeline, tanker or railway accidents.

*Deborah Gordon. Understanding Unconventional Oil. The Carnegie Papers (May 2012).

Define the types of unconventional oils explain their origin; explain what makes an oil reserve unconventional.

Understand the broad categories of unconventional oils, including which are currently commercially viable andwhich are more speculative.

Explain how oils are categorized as light or heavy; sweet or sour; and how these designations affect refining

decisions and refining profitability.

Interpret the differences between the carbon footprint of unconventional oils versus conventional oils and how

these differences shape governmental energy policy.


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NATURAL GAS AND COAL MARKETS PART I EXAM WEIGHT | 25%

Physical Properties

Types of gas

Units of measurement and heat content

Contractual terms contained in a gas sales agreement

Transportation and Storage Pipeline and storage economics

Global Natural Gas Markets and Price Dynamics

Hub pricing and basis markets

LNG regasification, transportation, and market dynamics

Oil indexation

Impact of US shale gas revolution on global markets

Natural Gas Liquids (NGLs) and Condensates

Global Coal Markets and Price Formation

Physical properties

Global benchmarks, contract specifications and trading

Fundamentals of international coal arbitrage

LEARNING OBJECTIVES FOR NATURAL GAS AND COAL MARKETS | 20 QUESTIONS

Vivek Chandra. Fundamentals of Natural Gas: An International Perspective. (Tulsa, Oklahoma: PennWell Books,

2006)

Chapter 4 Contracts and Project Development (Gas Sales and Transportation Contracts sections only)

Understand the mechanics and contractual terms contained in a gas sales agreement (GSA) including: take-or-pay

obligations, nominations, and force majeure.

Explain the financial and operational considerations related to the sale and transport of LNG.

Understand why LNG prices are indexed to crude oil prices in certain geographic regions (i.e. the JCC price in

Japan); calculate an LNG price using a sample crude oil index.

Vincent Kaminski. Energy Markets. (London, UK: Risk Books, 2012).

Chapter 10 Natural Gas Transportation and Storage

Develop a plan to transport natural gas to a specific destination via a pipeline network.

Calculate pipeline shipping costs for a given set of market assumptions.

Describe how pumping station fuel requirements are fulfilled on a pipeline; provide an example.

Identify the fixed and variable costs associated with natural gas pipeline charges, including tariffs.

Create a practical example to illustrate how and why a pipeline may be used to temporarily store natural gas

(linepack).

Summarize the steps in the nomination process, including balancing mechanisms, and the difference between

interruptible and firm delivery contracts.

Categorize factors that impact the cost structure of the LNG supply chain; explain LNG transportation andproduction technology trends.

Explain how natural gas storage inventories are reported and identify the weaknesses in the reporting

methodology.


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Chapter 26 Coal Markets

Compare and contrast the physical properties of anthracite, bituminous, sub-bituminous and lignite coal and know

how physical properties affect the value of coal.

Describe the features of popular coal contracts, including exchange-traded and OTC contracts.

Develop a scenario to demonstrate how volume overages/underages are dealt with in a typical coal contract.

Compare and contrast the economics of coal-fired and natural-gas fired power plants, and understand the

motivations for fuel-switching decisions.

*Gas Storage Industry Primer. Niska (April 2010).

Define terms associated with natural gas storage, including cushion gas, working gas, deliverability, and injection

rate.

Compare characteristics of different structures used for underground storage, including depleted reservoirs,

aquifers, and salt caverns.

Explain the embedded optionality in gas storage capacity; describe and explain drivers that influence the value of

a gas storage facility.

*International Gas Union. Wholesale Gas Price Formation: A Global View of Price Drivers and Regional Trends(June

2011). (Sections 1 to 5, and 8 to 10 only).

Apply the following natural gas pricing terms to market operations: wellhead price, border/beach price, hub price,

citygate price, end user price and netback price.

Understand how the beginning of natural gas imports and/or exports will affect pricing in a previously-closed

market.

Compare and contrast the eight key mechanisms for pricing natural gas and identify the geographic regions where

each is the dominant pricing mechanism.

Interpret gas supply and demand curves and the factors that affect the shape of those curves.

Describe the relationship between a local gas pricing mechanism, the observed market price, and the hypothetical

market-clearing price.

Understand how volatility impacts natural gas prices and how oil-linked prices can help mitigate the impact of

volatility.

Andrew Inkpen and Michael H. Moffett. The Global Oil and Gas Industry: Management, Strategy and Finance

(Tulsa, Oklahoma: PennWell Books, 2011).

Chapter 9 Liquefied Natural Gas

Describe the business structures and contractual arrangements used in LNG production and transportation.

Understand the basic operation of an LNG train and describe the steps in the LNG liquefaction process.

Compare the fundamentals of regional LNG markets in the Asia-Pacific region and the Atlantic Basin.

Examine the various factors associated with local geography and reserves affected the project development

process, using the Gorgon project as an example.

*International Energy Agency. Developing a Natural Gas Trading Hub in Asia: Obstacles and Challenges(2013).

Compare and contrast the three main types of market-based gas pricing mechanisms, explaining the main benefit

of each; describe the methods used to establish a price through government regulation.

Assess the development and impact of gas market pricing mechanisms in Asia, including the use of the JCC andS-Curve formulas.

Explain the current dynamics in the Asian natural gas market and understand how supply and transport

fragmentation is affecting the development of a regional pricing mechanism.

Compile a list of market and regulatory factors required for the efficient operation of a natural gas trading hub in

Asia and discuss the factors that contribute to price transparency.

Describe the market mechanisms through which financial-only transactions affect the price paid for natural gas

bought or sold for physical delivery.

Identify potential risks that market participants will face in developing an Asian natural gas trading hub.


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*Bassam Fattouh, Howard V. Rogers, and Peter Stewart. The US Shale Gas Revolution and its Impact on Qatars

Position in Gas Markets. Columbia Center on Global Energy Policy (March 2015).

Describe Qatars positioning in the global natural gas and liquefied natural gas marketplace.

Identify and describe the key drivers influencing the current natural gas and LNG global market dynamics post-US

shale gas revolution and the local impact on Qatar.

Explain the implications of the Fukushima nuclear accident on Asian LNG market dynamics.

Understand the economics of long and short-term investment decisions to export LNG.

Describe the rationale for production increases at a below breakeven price band in an oversupplied natural gasmarket, and infer its implications on global LNG market dynamics.

Define tight, balanced, and loose in terms of LNG market dynamics.

Explain why Singapore is well positioned to develop as an Asian LNG trading hub in the near future.

Identify the key macro and microeconomic challenges facing Qatari LNG sales.

Identify which countries currently have the most LNG capacity, and understand their collective impact on Qatars

gas revenues, pricing power, and investment choices.

Identify the key factors driving forecast uncertainty of future supply-demand balance.

*Oxford Energy: US NGL Production and Steam Cracker Substitution(Sept 2014).

Differentiate between the various types of NGLs (ethane, propane, butane, isobutane, natural gasoline) and

understand their primary applications and end-use products.

Understand the NGL economics associated with the surge in US shale production and explain their implications forNGLs as a feedstock for the petrochemical industry.

Describe NGL export implications on global trade patterns.

*Jesse Thompson. Producers, Refiners View Strategies to Trim Texas Glut of Ultralight Condensate Oil. Federal

Reserve Bank of Dallas (Q4 2014).

Define condensates and identify the major shale regions of the United States driving condensate production.

Compare the typical API characteristics of condensates vs. WTI crude oil.

Identify a primary use for condensates as a diluent, and understand its importance for producers, refiners, and

driver of international demand.

Explain local and global impacts of the shale revolution on condensate market dynamics.

Define splitters and interpret the recent investment surge in splitter projects.

*Richard K. Morse and Gang He. The Worlds Great Coal Arbitrage: Chinas Coal Import Behavior and Implications

for the Global Coal Market(Aug 2010).

Understand the basic economics of the Chinese coal market; compare domestic reserves to domestic demand.

Explain the arbitrage opportunities available to China-based coal buyers and the impact on global coal prices.

Describe the role of freight costs in setting coal market prices.

Describe how geographic fundamentals influence the decision to buy domestic Chinese coal or import

international coal; identify Indonesias key competitive advantage in exporting coal.

Explain the implications of key assumptions used in the arbitrage model presented in the paper, including technica

and operational limitations of the model.


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ELECTRICITY MARKETS AND RENEWABLE GENERATION PART I EXAM WEIGHT | 30%

Economics of Electricity Markets

Baseload, mid-merit, and peak generation

Consumer demand Value of Lost Load (VOLL)

Load management

Investing in generation

Global Market Design ISOs, RTOs and power pools

Day-Ahead and Real-Time markets

Energy-only vs. capacity markets

Transmission and Distribution

Mechanics

Congestion, losses, and pricing

Analytical Tools and Structured Solutions for Electricity Markets

Heat rate

Spark spreads

Generation stack

Ancillary services

Capacity payments Financial Transmission Rights (FTRs)

Tolling agreements

Renewable Generation and Integration

Wind and solar economics

Grid integration

Emissions

Emissions reduction programs and regulation

LEARNING OBJECTIVES FOR ELECTRICITY MARKETS AND RENEWABLE GENERATION | 24 QUESTIONS

Daniel Kirschen and Goran Strbac. Fundamentals of Power System Economics(West Sussex, UK: John Wiley &

Sons, 2004).

Chapter 3 Markets for Electrical Energy

Understand the role the spot (real time) market plays in the reliable operation of an electric grid.

Understand the strategy behind placing or accepting bids and offers on an open electricity market and how the

bidding process sets the wholesale price for electricity.

Explain the role of the system marginal price (SMP) in an electricity pool.

Calculate the settlement of electricity contracts, including instances when imbalances exist.

Chapter 4 Participating in Markets for Electrical Energy (Sections 4 to 4.3.1.14 only)

Understand the methods used to determine the amount a customer is willing to pay for electricity, including value

of lost load (VOLL). Identify the economic factors that a power retailer considers, and understand demand forecasting.

Understand the relationship between the marginal cost of generation and market prices.

Evaluate the profitability of a generating unit that dispatches electricity based on a given set of market parameters

and operating factors, including start-up costs.


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Chapter 6 Transmission

Explain how transmission constraints and network losses can affect electricity trading, and understand how these

limitations and price fluctuations may be hedged.

Describe trading in a two-bus and three-bus power system.

Understand some of the difficulties associated with physical transmission rights.

Explain how the price of electricity is determined when line losses or congestion occur.

Identify various components of the transmission system that must be systematically taken out of service formaintenance, and understand how constrained transmission impacts nominal capacity and arbitrage opportunities

Compare and contrast locational marginal pricing and nodal pricing.

Describe the physical and financial implications of linking two grid networks.

Identify and distinguish the various types of losses that are encountered in power systems, and calculate the

marginal cost of losses given a set of market assumptions.

Understand the use of Financial Transmission Rights (FTRs) as a tool in managing congestion and explain how

FTRs are valued for market purposes.

Chapter 7 Investing in Generation

Apply the internal rate of return (IRR) and minimum acceptable rate of return (MARR) to assess the economic

viability of a plant; explain how a plants operating characteristics impact its IRR.

Understand how a plants utilization factor will affect its IRR, particularly for renewable power installations. Identify the market factors used to determine power plant upgrade or retirement decisions.

Interpret a load-duration curve and understand its application in the decision to invest in additional power

generation capacity.

Understand how a marginal generating unit sets electricity prices.

Understand the process for creating an auction bid for a peaker plant given a set of market assumptions.

Explain how the result from a capacity element (CE) calculation will incentivize construction of additional

generation capacity.

Vincent Kaminski. Energy Markets(London, UK: Risk Books, 2012).

Chapter 22 Analytical Tools

Calculate and compare results for a capacity factor, availability factor, load factor, and demand factor given a set

of market assumptions.

Understand and compare the relationship between thermal efficiency and the heat rate; use the heat rate to

calculate the marginal cost of electricity.

Calculate a spark spread, including clean and dark spreads, and understand how they are applied.

Explain challenges associated with spark spread modeling.

Interpret the supply stack (generation stack) and understand its limitations.

Identify sources of data for electricity generation and explain how emission estimates can be derived from

published data.

Understand how data about the electricity forward curve, cash market transactions, power/fuel price spreads, and

power outages is collected and reported by price reporting agencies.


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Chapter 23 Electricity Market Transactions

Define and apply examples of ancillary services.

Explain the mechanics of providing reactive power and voltage support.

Understand the rationale and criticisms of capacity payments.

Identify key challenges and considerations in the implementation of a capacity payments system.

Structure a Financial Transmission Rights (FTR) transaction and calculate its payout. Differentiate between auction revenue rights (ARRs) and the FTR auctioning system; construct a practical

application for each.

Identify drawbacks in the application of FTR transactions and understand how credit risk is created.

Explain the mechanics of power pool transactions in the US; identify frequently used block types and time buckets

Understand the role of power marketers in the electricity market; explain the use full requirements contracts by

power marketers and identify the associated risks.

Understand the rationale of using a tolling transaction and describe the settlement of a tolling transaction.

*Kenneth Skinner. Heat Rates, Spark Spreads and the Economics of Tolling Agreements(Dec 2010).

Explain the economic rationale for entering into tolling agreements and identify the risks associated with such

transactions.

Define heat rates and spark spreads, and explain how these concepts are applied in tolling agreements. Distinguish between operating heat rate, economic heat rate, and market implied heat rate.

Calculate a breakeven fuel cost for a given power-purchase price.

Describe the typical components of a tolling fee and the market dynamics inherent in a reverse toll.

Understand the key components of a tolling agreement term sheet.

*Market Evolution: Wholesale Electricity Market Design for 21st Century Power Systems(Oct 2013).

(Sections 1 - 4 only).

Identify challenges associated with modern electricity markets and explain actions that can help resolve these

challenges.

Understand the market mechanisms available that can improve the adequacy, generating capacity, and ancillary

services of markets that contain a large proportion of variable renewable energy.

Compare the benefits and weaknesses of energy-only markets and capacity markets; identify global examples of

their implementation.

Explain how negative electricity prices can arise and their practical impact on power markets.

Identify challenges related to the implementation of demand response programs and the market rules that can be

adopted to incorporate demand response.

Kathleen Spees, Samuel A. Newell, and Johannes P. Pfeifenberger. Capacity Markets Lessons Learned from the

First Decade. Economics of Energy & Environmental Policy, 2013, Volume 2, Number 2.

Compare capacity markets to energy-only markets and describe advantages and disadvantages of each market

structure.

Compare how energy-only markets and capacity markets address the issue of resource adequacy, including

incentives for incremental generators.

Compare elements of capacity market designs across different capacity markets.

Summarize characteristics of supply and demand curves in capacity markets.

Explain challenges faced by capacity markets.


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*Federal Energy Regulatory Commission:Operator Initiated Commitments in RTO and ISO Markets(Dec 2014).

Define an operator-initiated commitment and understand the challenges posed by physical and operational

constraints in the day-ahead and real-time market processes in influencing price formation.

Define the following terms and their application in the electricity markets: Regional Transmission Operators (RTOs)

Independent System Operators (ISOs), Locational Marginal Prices (LMPs), Day-Ahead (DA) market, and Real-Time

(RT) market. Explain the processes RTOs and ISOs use to commit and dispatch resources in day-ahead and real-time, including

the market design challenges associated with physical and operational constraints.

Understand the extent to which out-of-market commitments made by RTOs and ISOs affect price formation in

energy and ancillary service markets.

Distinguish between the operating objectives of RTOs and ISOs and how achievement of these objectives is

measured.

Identify the typical steps involved in developing a system resource schedule, and understand the indirect effect

that un-modeled reliability requirements may have on energy and ancillary service prices.

Identify the components contained in most resource supply offers as well as typical transmission parameters

included in network models.

Explain how Day-Ahead and Real-Time markets operate, and provide an example of a cleared day-ahead resource

commitment. Identify key features of the following day-ahead markets: CAISO, ISO-NE, MISO, NYISO, PJM, SPP.

Understand how RTOs and ISOs address reliability issues that are not resolved in the day-ahead schedule.

Describe the need for real-time markets, explain how real-time markets operate, and understand how real-time

load forecasts influence RTO and ISO decisions to satisfy future load growth.

Determine the LMP given a set of market assumptions.

Rebecca Busby. Wind Power: The Industry Grows Up. (Tulsa, Oklahoma: PennWell Books, 2012).

Chapter 6 Wind Farms: Developing and Operating Wind Power Plants

Identify and assess the steps and challenges associated with the development of a wind farm, including site

selection, turbine selection, grid interconnection, modeling and initial design, the spacing and siting of turbines,

energy sales agreements, contracting, and financing.

Evaluate key factors that influence power production from a wind installation, including design class, availability,

and the capacity factor.

Understand and assess the economic impact on wind projects created by government incentives, including

production tax credits, renewable energy credits, and feed-in tariffs.

Identify the economic and operational risks that are typically associated with development of a wind farm.

Explain how the performance of wind installations is monitored, and understand how unplanned maintenance and

operating shutdowns can be minimized.

*MIT Interdisciplinary Study. The Future of Solar Energy(2015).

Chapter 1 Introduction and Overview (Pages 1 - 11 only)

Understand solar energys role in achieving a relative balance between emission reduction initiatives and providing

the energy services necessary to accommodate global economic growth.

Describe potential obstacles in the development and future growth of the solar energy market.

Define intermittency and understand how it factors into the integration of large-scale solar generation into the

electric power system.

Understand key advantages of solar photovoltaic (PV) technology over conventional fossil-fueled generation.


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Chapter 4 Solar PV Installations

Compare the features, business models, and cost breakdowns of utility-scale, commercial, and residential

photovoltaic solar installations and provide examples of each.

Summarize cost trends for PV solar systems over the period 2008-2014.

Describe the impact of subsidies, tax credits, and power purchase agreements on the development and financing

of solar PV projects. Describe financial structures and mechanisms which can be used to finance a solar project.

Compare the income, market and cost methods to value solar PV projects and value a project using each method.

Chapter 8 Integration of Solar Generation in Wholesale Electricity Markets

Describe the characteristics of solar energy output and the factors affecting power output levels: angle of sun,

placement of panels, etc.

Explain the impact of an increase in solar energy penetration on an electricity market, including load

characteristics, market prices, cost profiles, and the impact on other generators in the merit order.

Assess the potential role of concentrating solar power (CSP) plants and energy storage in a power grid.

*Jurgen Weiss and Bruce Tsuchida. Integrating Renewable Energy into the Electricity Grid. Advanced Energy

Economy Institute (June 2015).

Identify trends in renewable energy capacity and integration in the United States, and describe the measures an

ISO (ERCOT) and vertically-integrated utility (Xcel Energy) have taken to facilitate the integration of renewable

energy to the grid.

Explain how an electric system characterized by a rising share of renewable energy could impact system

operations, reliability, and existing transmission and distribution infrastructure.

Describe operational, technological, and analytical tools that ISOs and utilities have at their disposal to integrate

large and growing shares of renewable generation while maintaining high levels of reliability.

Describe ancillary services, and explain how renewable integration has influenced ERCOTs redesign of ancillary

service markets.

Identify the primary concerns and obligations of electric system operators when dealing with renewable power

sources.

Explain the evolution of metrics to assess variable renewable energys contribution to meet peak demand within a

system with increasing shares of renewable generation.

Describe how advances in wind forecasting impact system operators resource commitment decisions.

Define Demand Response (DR) and explain its role in maintaining system reliability.

Andrea Roncoroni, Gianluca Fusai, Mark Cummins, eds. Handbook of Multi-Commodity Markets and Products:

Structuring, Trading and Risk Management. (West Sussex, UK: John Wiley & Sons, 2015).

Chapter 5 Emissions Markets and Products

Summarize and describe key elements of initiatives designed to limit the impact of climate change, including the

UN Framework Convention and the Kyoto Protocol.

Describe the European ETS system, including covered industries, market participants, and criteria for allocating,

auctioning and trading allowances. Compare regional and voluntary initiatives to reduce carbon emissions.

Describe factors that can impact the price of carbon permits (allowances) and assess models of price formation for

ETS carbon allowances.

Explain dynamics that influence the fuel-switching decision for generators in a market with carbon allowances.


21/35




LEARNING OBJECTIVES

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22/35




PRICE FORMATION IN ENERGY MARKETS PART II EXAM WEIGHT | 15%

Statistics and Probability

Random variables and probability distributions

Expected value, mean, variance, and standard deviation

Skew and kurtosis Joint and marginal probability distributions

Covariance and correlation

Minimum variance hedging

Technical Properties of Energy Price Formation

Geometric Brownian Motion

Mean reversion

Spikes and seasonality

Volatility

Fundamental Characteristics of Commodity Price Formation

Macroeconomic factors

Short-run price drivers

Long-run price drivers

LEARNING OBJECTIVES FOR PRICE FORMATION IN ENERGY MARKETS | 9 QUESTIONS

Michael Miller. Mathematics and Statistics for Financial Risk Management. (Hoboken, New Jersey: John Wiley &

Sons 2014).

Chapter 2 Probabilities

Compare, contrast, and identify continuous and discrete random variables.

Distinguish between the probability density function, the cumulative distribution function, and the inverse

cumulative distribution function.

Calculate the probability of an event given a discrete probability function.

Differentiate between independent and mutually exclusive events.

Understand joint probability; calculate joint probabilities using a probability matrix.

Define and differentiate between conditional and unconditional probabilities, and calculate the conditional

probability using assumptions for a given scenario.

Chapter 3 Basic Statistics (Averages - Kurtosis only)

Apply and interpret the mean, standard deviation, and variance of a random variable.

Calculate and interpret the covariance and correlation between two random variables.

Calculate the mean and variance of sums of variables.

Interpret and calculate the minimum variance hedge ratio.

Describe the four central moments of a statistical variable or distribution: mean, variance, skew, and kurtosis.

Interpret the skew and kurtosis of a statistical distribution.

Chapter 4 Distributions (Parametric - Students t Distribution only)

Identify the distinguishing characteristics of parametric and nonparametric distributions.

Describe and apply the Central Limit Theorem.

Describe the properties of independent and identically distributed (i.i.d.) random variables.

Summarize and identify key properties of a uniform distribution, Bernoulli distribution, Binomial distribution,

Poisson distribution, normal distribution, lognormal distribution, Chi-squared distribution, and Students t

distribution; illustrate and assess practical applications of each.


23/35




Les Clewlow and Chris Strickland. Energy Derivatives: Pricing and Risk Management. (Lacima Publications. 2000).

Chapter 2 Understanding and Analyzing Spot Prices

Understand mean reversion and its impact on spot price formation.

Identify weaknesses in using the Black-Scholes Merton model to replicate the behavior of energy commodity spot

prices.

Understand why energy price jumps occur, describe the impact of jumps on spot price behavior, and explain how

jumps can be simulated. Describe how seasonality is accounted for when estimating energy spot prices.

Chapter 3 Volatility Estimation in Energy Markets

Summarize the practical challenges of modeling energy price behavior.

Estimate volatility for a given set of historical price data; understand how volatility is scaled for a specific time

horizon.

Describe the market convention used to derive implied volatility.

Interpret a volatility smile, explain how it is derived and understand its relationship to implied volatility.

Identify weaknesses in using a Geometric Brownian Motion process to model energy prices.

Describe the characteristics of a leptokurtic distribution.

*Hillard Huntington, Saud M. Al-Fattah, Zhuo Huang, Michael Guewa, and Ali Nouri. Oil Price Drivers andMovements: The Challenge for Future Research. (2012 Rev. 2013).

Identify macroeconomic, geopolitical, and technological drivers which have triggered supply and demand

adjustments and increased the complexity in forecasting global oil prices.

Identify and explain the primary drivers and trends influencing the short-run and long-run price of oil.

Distinguish between the key components of simulation, optimization, game-theoretic, and computational long-

term model structures.

Identify and explain predominant drivers and trends impacting oil market demand behavior and volatility.

Distinguish the key components and goals of short-term and long-term models.

Understand the implications of increased financing activity in commodity markets.

Describe the price elasticity for short-run oil demand.

Distinguish between the key components and goals of the following price forecasting approaches: reduced form

models, financial models, hybrid models, volatility models, and Granger causality tests.


24/35




FINANCIAL ENERGY PRODUCTS PART II EXAM WEIGHT | 25%

Forwards and Futures

Market mechanics

Storage costs

Arbitrage theory

Valuation and hedging Backwardation and contango

Energy Commodity Swaps

Basis swaps

Swing swaps

Fixed-floating, floating-floating, and index swaps

Exchange for physicals (EFP)

Options and Option Strategies

Market mechanics

Plain-vanilla options

Spreads, straddles, collars, caps and floors

Hedging using options

Swing options and Volumetric Production Payments (VPPs) Weather derivatives, CDDs and HDDs

Global Regulation of Financially Traded Energy Products

LEARNING OBJECTIVES FOR FINANCIAL ENERGY PRODUCTS | 15 QUESTIONS

Robert McDonald. Derivatives Markets. (Pearson: 2013).

Chapter 4 Introduction to Risk Management

Compare and contrast the use of forward contracts and option strategies to hedge risk exposures; describe and

calculate the payoff function and cash flows for each strategy.

Understand why firms manage risk and engage in hedging transactions.

Identify scenarios in which hedging activity adds value to a firm, and understand the reasons a firm might choose

not to hedge a risk exposure.

Understand and apply collar strategies, including zero-cost collars and pay-later strategies, to hedge risk

exposures; assess their payoff functions.

Explain how firms engage in cross-hedging strategies to reduce risk exposures created by the price differential

between two assets; construct a cross-hedge and calculate the proper hedge notional amounts.

Understand how the correlation between asset prices will impact the optimal hedge amount when implementing a

cross hedging strategy.


25/35




Chapter 6 Commodity Forwards and Futures (Sections 6.1 to 6.3 and 6.6 to 6.8 only)

Explain the basic equilibrium formula for pricing commodity forwards.

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

Define the lease rate and explain how it determines the no-arbitrage values for commodity forwards and futures.

Define carry markets, and illustrate the impact of storage costs and convenience yields on commodity forward

prices and no-arbitrage bounds.

Compute the forward price of a commodity with storage costs.

Compute a commodity spread.

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

Evaluate the differences between a strip hedge and a stack hedge and explain how these differences impact risk

management.

Provide examples of cross-hedging, such as assessing the process of hedging jet fuel with crude oil and using

weather derivatives.

Construct a synthetic commodity position, and use it to explain the relationship between the forward price and the

expected future spot price.

Calculate heating degree days (HDD) and cooling degree days (CDD); understand and assess the application of a

weather derivative to hedge weather related risk.

*International Energy Agency. The Mechanics of the Derivatives Markets: What They Are and How They Function

(April 2011). Explain the role of hedgers, speculators, and arbitrageurs in a derivatives market.

Compare and contrast forward and futures contracts and understand how they are applied.

Understand the mechanics of a futures position; assess the margin requirements and profitability of an open

futures contract.

Identify circumstances that would require posting of additional margin (a margin call); quantify the margin

requirements for a specified period of time based on incremental MtM valuations.

Differentiate and apply market, limit and stop-loss orders.

Use a long or short futures position to hedge a commodity exposure or an obligation to buy or sell a commodity.

Describe the mechanics of swaps and explain the function of the swap counterparty, including swap dealers.

Use forward prices and interest rates to calculate a periodic swap settlement for a multiyear commodity swap.

Understand how the market value of a swap changes over time and describe factors that affect the market value

of a swap. Demonstrate how a swap represents an implicit lending agreement, use forward commodity prices and interest

rates to derive a fixed swap rate (swap price).

Compare and contrast American, European and Bermudan options and understand their use.

Understand the mechanics and payoff profiles of call and put options; identify when an option contract is in, at, or

out of the money.


26/35




Vincent Kaminski. Energy Markets(London, UK: Risk Books, 2012).

Chapter 4 Energy Markets: The Instruments

Describe the relationship between spot, forward and futures prices, and identify challenges related to price

formation of energy futures.

Define a futures contract and contrast the mark-to-market value of forward versus futures positions.

Understand the characteristics of forward price curves including backwardation and contango; construct a

forward price curve.

Describe market frictions and imperfections that can impact price formation in a forward price curve. Define convenience yield and explain why the concept of convenience yield is often disregarded by market

practitioners.

Compare theoretical and practical approaches to modeling the forward curve and provide advantages and

disadvantages of each.

Assess the sensitivity of commodity swaps to changes in interest rates and describe the use of the LIBOR curve in

commodity swaps.

Describe the mechanics of and calculate the settlement for the following types of swaps: physical, financial, basis,

and Asian swaps.

Describe the payout function and calculate payouts on the following types of options: an Asian call and put, a call

and put on a spread option, and a binary (cash-or-nothing) option.

Understand the mechanics of and applications for volume-based options, including swing options and take-or-pay

options.

Chapter 11 US Natural Gas Markets

Describe characteristics of the US natural gas market, interpret the shape of and relationship between elasticity of

supply and demand curves, and identify market factors that explain these characteristics.

Understand the market mechanism that maintains balance between supply and demand in the short-term natural

gas market.

Summarize the factors that contribute to price volatility in the natural gas market, including the impact of traders

and speculators.

Explain how physical basis transactions affect natural gas price formation and price reporting.

Understand how regional natural gas price indices are developed and reported.

Structure and apply a fixed-for-floating, a floating-for-floating, and a natural gas basis swap; calculate a swap

settlement for each.

Describe Exchange for Physicals (EFPs) transactions and understand their practical application.

Understand the application of and economic rationale for Volumetric Production Payments (VPPs); identify the

risks borne by buyers and sellers of VPPs.

Explain how natural gas processing plants can mitigate market risk through contracts that include fixed-fee,

percentage of proceeds, percentage of index, and keep-whole provisions.

Identify and compare the application of structuring solutions for mitigating volumetric risk, including swing

options, swaps with embedded call options, weather derivatives and tariff positions.

Chapter 18 Transactions in the Oil Markets

Describe the mechanics of a collar strategy, including costless collars, extendable collars, three-way collars, and

four-way collars. Summarize the risks associated with using a costless collar strategy, particularly when transactions are backed by

collateral.

Construct and interpret a crack spread and identify potential risks that refineries face in using crack spreads as a

hedge.

Explain the mechanics and application of a participating swap used to hedge a crude oil position.

Identify and understand the application of available indices and derivative contracts that shipping companies can

use to monitor and mitigate freight risk, and apply a forward freight agreement (FFA).


27/35




*Gordon Goodman. Swaps: Dodd-Frank Memories(July 2013).

Understand the financial limits and other obligations that a counterparty must meet to qualify for the end-user

exemption.

Explain how the use of swap hedges is affected under Dodd-Frank.

Understand and apply the de minimis threshold and major swap participant (MSP) test as they apply to

counterparty end-user qualification.

Summarize the reporting process under Dodd-Frank, and identify when a counterparty is obligated to report a

transaction to a swap data repository (SDR).

*Gordon Goodman. Dodd-Franks Impact on Financial Entities, Financial Activities and Treasury Affiliates(Oct

2013).

Understand and interpret the definition of a financial entity under the Dodd-Frank Act; explain how this

designation affects mandatory clearing requirements.

Construct or identify scenarios in which the end-user exemption may be applied to organizations deemed financial

entities.

*Financial Conduct Authority: Regulating the Commodity Markets: A Guide to the Role of the FCA(Feb 2014).

Explain the regulatory framework and the role of the Financial Conduct Authority (FCA) as it relates to the

commodity markets.

Describe the key objective, scope, and potential impacts of the following European legislations: EMIR, MiFID, andMAR.


28/35




RISK MANAGEMENT TOOLS PART II EXAM WEIGHT | 60%

Creating an Energy Risk Management Framework

Model control framework and validation of pricing inputs

Quantifying Market Risk

Options and derivative risks

Value at Risk (VaR): applications and limitations Historical and implied volatility, variance, skew and smile

Modeling processes (EWMA, GARCH, etc.)

Stress-testing

Liquidity risk and Liquidity Adjusted VaR

Credit Risk and Assessment

Credit ratings, scoring and risk modeling

Oil and gas lending structure and collateral valuation

Counterparty Credit Exposures, Pricing, Mitigation and Documentation

Settlement and replacement risk

Potential future exposure

Netting agreements

Collateralization Credit Value Adjustment (CVA)

ISDA Master and Credit Support Annex

Central counterparty clearing

Expected loss, loss given default, and probability of default

Country Risk Determinants, Measures, and Implications

Sovereign risks, ratings, and assessment

Political, economic, social, and security risks

Enterprise Risk Management

Determining and communicating risk appetite and risk tolerance

Risk identification, assessment and mitigation process

Integrating risk into strategic decisions

Quantitative and Qualitative Operational Risk Measures

Key Risk Indicators (KRIs)

Key Performance Indicators (KPIs)

Business Ethics and the GARP Code of Conduct

LEARNING OBJECTIVES FOR RISK MANAGEMENT TOOLS | 36 QUESTIONS

Glen Swindle. Valuation and Risk Management in Energy Markets. (New York: Cambridge University Press, 2014).

Chapter 16 Control, Risk Metrics and Credit

Distinguish between the volume and tenor of actively traded commodities.

Identify standard risk metrics, with reference to illiquid basis positions. Describe the typical model control framework, validation of pricing inputs, and role of consensus service providers

Understand how seasonality poses a challenge for banks which trade in multiple asset classes.

Interpret the power/natural gas hierarchy for a market using the Northeast US region as an example.

Describe management of credit risk in energy portfolios, centralized clearing, and the role of the CVA desk.

Identify macroeconomic effects of the recent global crisis on airlines and energy prices.


29/35




John C. Hull. Risk Management and Financial Institutions. (Hoboken, New Jersey: John Wiley & Sons 2015).

Chapter 8 How Traders Manage Risk

Define delta hedging and explain its application in the immunization of market risk associated with linear and

nonlinear financial products.

Construct a delta hedge for an option contract or portfolio of options; assess and rebalance a delta hedge for a

given set of price changes.

Define gamma and explain the relationship between delta and gamma; construct a gamma hedge and a delta-

gamma hedge by using a combination of options and the underlying asset. Define vega and construct a vega-neutral position; calculate the quantity of options necessary to make a portfolio

gamma-neutral and vega-neutral.

Define theta and rho as they relate to individual options and option portfolios.

Explain how dynamic hedging of delta, gamma, vega, theta, and rho is typically done in practice.

Chapter 10 Volatility

Describe and calculate the volatility of an asset return over various time periods.

Understand how the power law can be used in modeling fat-tailed return distributions; apply the power law to

estimate the probability of a variable exceeding a specified level.

Explain how the Exponentially Weighted Moving Average (EWMA) and the GARCH (1,1) model are used to forecast

volatility; understand the practical application of the two models and interpret results from each.

Chapter 12 Value-at-Risk and Expected Shortfall

Identify the parameters for a VaR calculation and describe the strengths and weaknesses of using VaR.

Calculate VaR for a single position or a portfolio using different time horizons and confidence levels.

Describe and calculate expected shortfall (ES); interpret the results from a VaR and ES calculation.

Summarize the four conditions required for a risk measure to be coherent; explain why VaR is not a coherent risk

measure.

Estimate the marginal VaR, component VaR, and incremental VaR for a given position in a portfolio or for a

potential addition to a portfolio.

Explain the process of backtesting VaR and interpret results from backtesting a VaR model.

Chapter 24 Liquidity Risk

Describe trading liquidity and identify factors that impact the liquidity of an asset or market.

Explain how liquidity in a financial market can be measured using spreads; calculate the liquidation cost and

liquidity-adjusted VaR of a position to be liquidated in the market.

Describe liquidity funding risk and explain potential sources of liquidity for a financial institution.

Identify factors that cause feedback loops in financial markets and explain how feedback loops can amplify price

dislocations and impact market liquidity.

Explain how changes in leverage, investor sentiment, regulation, and modeling practices can impact the liquidity in

a market.

Les Clewlow and Chris Strickland. Energy Derivatives: Pricing and Risk Management(Lacima Publications. 2000).

Chapter 10 Value-at-Risk

Understand the relationship between the Simple Moving Average (SMA) and Exponentially Weighted Moving

Average (EWMA) methods for calculating VaR; identify advantages and disadvantages of each.

Understand how the decay factor affects output from an EWMA model; explain considerations for selecting the

decay factor.

Describe limitations in applying VaR as a risk management tool for energy assets.

Calculate VaR for a two-security energy portfolio given the correlation coefficient between assets, explain the

relationship between correlation and VaR.

Differentiate between delta VaR, delta-gamma VaR, historical simulations, and Monte Carlo simulations.

Understand, summarize and interpret the methodologies for backtesting VaR.


30/35




Kevin Dowd. Measuring Market Risk, Second Edition. (Hoboken, New Jersey: John Wiley & Sons 2005).

Chapter 13 Stress Testing

Understand the benefits of stress testing and identify situations in which stress tests are an effective assessment of

risk.

Compare the application of stress test results to VaR or expected shortfall.

Identify the challenges of designing and implementing stress tests.

Summarize the process of scenario analysis and identify guidelines for successful scenario analysis.

Develop practical scenarios and evaluate their potential impact on stress test results. Compare and contrast mechanical stress testing techniques to the application of scenario analysis.

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

Other Energy Markets(Hoboken, New Jersey: John Wiley & Sons, 2007).

Chapter 3.4 Risk Management (Credit Risk section only).

Understand the relationship between settlement risk and replacement risk, calculate settlement and replacement

risk for an energy commodity transaction based on a given a set of assumptions.

Summarize and interpret external credit ratings and their related default probabilities.

Identify common quantitative internal rating factors, explain their application and how they differ from external

credit ratings.

Explain the important credit risk measures used to quantify credit risk, including: Risk-at-Default, Expected Loss,

Potential Exposure and Credit VaR; perform a simple calculation of each measure given a set of market inputs.

Describe the credit risk-reducing methods commonly-used with energy transactions.

Jon Gregory. Counterparty Credit Risk and Credit Value Adjustment: A Continuing Challenge for Global Financial

Markets. (Hoboken, New Jersey: John Wiley & Sons 2012).

Chapter 3 Defining Counterparty Credit Risk

Define counterparty risk and differentiate it from lending risk.

Identify transactions with counterparty risk and explain how counterparty risk is created in each transaction.

Differentiate between settlement risk and pre-settlement risk.

Define credit exposure, credit migration, recovery, mark-to-market, replacement cost, default probability, loss

given default and the recovery rate.

Identify and describe the different tools available to manage or mitigate counterparty risk.

Chapter 4 Netting, Compression, Resets and Termination Features

Explain the purpose of an ISDA master agreement.

Summarize netting and close-out procedures (including multilateral netting), describe their strengths and

weaknesses, and understand how they fit into the framework of the ISDA master agreement.

Define netting and understand how it is used to reduce credit exposure under various scenarios.

Describe the mechanics of termination provisions and explain their advantages and disadvantages.

Define walkaway features and identify the disadvantages in using walkaway features.


31/35




Chapter 5 Collateral

Define collateralization and explain the mechanics of the collateralization process.

Describe the role of a valuation agent, the types of collateral that are typically used, and the process for

reconciling collateral disputes.

Describe features of a credit support annex (CSA) as they relate to the ISDA master agreement and identify terms

that are typically included in a CSA.

Describe types of collateral that are typically used.

Summarize and apply standard terms found in a collateralization agreement including: links to credit quality,margin and call frequency, thresholds, independent amount, minimum transfers, rounding, haircuts, interest, and

rehypothecation.

Differentiate between a two-way and one-way CSA agreement and describe how collateral parameters can be

linked to credit quality.

Explain how market risk, operational risk, and liquidity risk (including funding liquidity risk) can arise through

collateralization.

Chapter 7 Central Counterparties

Understand how a Central Counterparty (CCP) clears financial transactions; describe the effect a CCP has on risk

allocation and its potential impact on systemic risk.

Describe how transactions are assessed and approved for clearing through a CCP.

Explain how a CCP manages default, particularly how netting is employed in such a circumstance. Summarize the financial waterfall used by CCPs to absorb defaults.

Differentiate between initial and variation margin; identify factors used by a CCP to calculate the initial margin

requirement for a transaction.

Define reserve funds, capital calls, and loss mutualization.

Explain how CCPs can create moral hazard among market participants.

Summarize the steps a CCP may take to replace or port a defaulted exposure.

Chapter 8 Credit Exposure

Describe and interpret frequently used metrics to quantify credit exposure, including expected mark-to-market,

expected exposure, potential future exposure, expected positive exposure, effective exposure, and maximum

exposure.

Compare the characterization of credit exposure to VaR methods and describe additional considerations used in

the determination of credit exposure.

Identify factors that affect the calculation of the credit exposure profile and summarize the impact of collateral on

exposure.

Identify typical credit exposure profiles for swaps, options, and credit derivatives.

Explain how payment frequencies and exercise dates affect the exposure profile of various securities.

Interpret the impact of correlation on netting and calculate the netting factor.

Explain the impact of collateralization on exposure, and assess the risk associated with the remargining period.

Explain the difference between risk-neutral and real-world parameters, and describe their use in assessing risk.

Chapter 12 Credit Value Adjustment (Section 12.1 only)

Explain the motivation for and the challenges related to pricing counterparty risk.

Define Credit Value Adjustment (CVA) and describe how CVA is applied.

Calculate the CVA spread with no wrong-way risk, netting or collateralization.


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Allan Malz. Financial Risk Management: Models, History, and Institutions. (Hoboken, NJ: John Wiley & Sons, 2011).

Chapter 6 Credit and Counterparty Risk

Summarize the various levels of debt seniority including their respective security, collateral and priority.

Calculate and interpret the expected loss, loss given default, probability of default, and expected return for a credit

risk exposure.

Summarize credit assessment tools, including credit ratings, rating migration, internal ratings, and credit risk

models.

Define counterparty risk and differentiate between counterparty risk and credit risk.

*Aswath Damodaran: Country Risk Determinants, Measures and Implications 2015 Edition(July 2015)

(Pages 1 39 only).

Identify sources of country risk.

Explain how life cycle, political risk, legal risk, and economic structure affect a countrys risk exposure.

Evaluate composite measures of risk that incorporate all types of country risk and explain limitations of the r

erp 2016 learningobjectives finalv4 2 (1)

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