erp aim statements 2013-web

2013

ERPExaminationAIM Statements

2013 Energy Risk Professional (ERP®) Examination AIM Statements

© 2013 Global Association of Risk Professionals. All rights reserved. 1

ERP Examination Approach

The ERP Examination is a comprehen-

sive, practice-oriented assessment

that spans both the physical and

financial energy markets. Candidates

are expected to demonstrate an

understanding of important concepts

associated with several broad areas

of study:

• Exploration, production, distribution,

and storage of physical hydrocarbon

resources and refined products.

• Electric power generation, distribu-

tion and market trading instruments.

• Sources of renewable power gener-

ation, project finance, trends in

carbon pricing and global emissions

trading.

• Financially traded energy commod-

ity products, including exchange

traded contracts, over-the-counter

derivatives and other structured

products.

• Market risk measurement, including

energy spot and forward price for-

mation, volatility, financial option

valuation, real options; fundamental

probability, statistics and modeling

principles.

• Credit and counterparty risk assess-

ment and management.

• Operational risk evaluation, strategic

risk management and corporate

governance.

• Current issues affecting the physical

and financial energy markets.

ERP Core Readings

The 2013 ERP Study Guide sets forth

primary topics and readings that cover

physical energy commodities, physical

operations, and financially traded

energy products; as well as the tools

used to identify, measure and manage

risk across the entire energy value

chain. New readings have been added

to ensure that the 2013 ERP Examina-

tion remains both timely and relevant.

In many cases new readings have

been sourced online as energy risk

management is not always covered in

traditional textbooks. All topics and

readings were selected in conjunction

with the Energy Oversight Committee

(EOC) after assessing the fundamental

knowledge, skills and abilities neces-

sary for professionals that manage

risk in the energy industry.

ERP Study Guide, AIMs and

Exam Preparation

Questions for the ERP Examination are

related and supported by the readings

outlined in the 2013 Study Guide.

The 2013 Applying Instructional

Materials Statements (AIMs) summa-

rize the primary learning objectives

for each reading outlined in the Study

Guide. The Study Guide and AIMs

together form the blueprint for devel-

oping the 2013 ERP Exam. Candidates

are strongly encouraged to use these

documents in conjunction with the

2013 ERP Exam Preparation Handbook

as they prepare for the exam.

Test Weights and Question Allocation for the 2013 ERP Examination

Test weights and question allocation for the 2013 ERP examination have

been structured to create an exam that balances intellectual rigor against

exam validity and reliability, two important characteristics of any professional

certification exam.

Physical Energy Commodities and Markets

• Hydrocarbon Resources 25% 40 questions

• Electricity Production and Distribution 10% 16 questions

• Renewable Energy 10% 16 questions

Section Total 45% 72 questions

Financial Products and Risk Management

• Financially Traded Products 15% 24 questions

• Price Formation, Market Risk and Valuation 15% 24 questions

• Credit and Counterparty Risk 10% 16 questions

• Operational Risk and Strategic Risk Management 10% 16 questions

Section Total 50% 80 questions

Current Issues in Energy 5% 8 questions

Exam Total 100% 160 questions

Table of Contents

Section 1: Physical Energy Commodities and Markets

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

Electricity Production and Distribution .............................................................................11

Renewable Energy ....................................................................................................................15

Section 2: Financial Products and Risk Management

Financially Traded Products and Real Options .............................................................19

Price Formation, Market Risk and Valuation..................................................................25

Credit and Counterparty Risk..............................................................................................32

Operational Risk and Strategic Risk Management......................................................36

Section 3: Current Issues in Energy

Current Issues in Energy .......................................................................................................40



PHYSICAL ENERGY COMMODITIES AND MARKETS

HYDROCARBON RESOURCES—Exam Weight | 25%

• Exploration and Production

• Crude Oil Transportation, Refining and Industry Trends

• Crude Oil Market Dynamics and Pricing

• Natural Gas

• Liquefied Natural Gas (LNG)

• Unconventional Products

• Global Gas Price Formation

• Coal

Readings for Hydrocarbon Resources—40 Questions

1.1 Exploration and Production

1. Joseph Hilyard. The Oil and Gas Industry: A Non-Technical Guide. (Tulsa, OK: PennWell, 2012).

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

• Chapter 2.....................Oil Overview

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

(Tulsa, OK: PennWell, 2012).

• Chapter 4 ....................Developing Oil and Gas Projects

3. Charlotte Wright and Rebecca Gallun. Fundamentals of Oil & Gas Accounting, 5th Edition

(Tulsa, OK: PennWell, 2008).

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

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

4. Peter A. Nolan and Mark C. Thurber. On the State’s Choices of Oil Company: Risk Management and the Frontier

of the Petroleum Industry (PESD Stanford).

Freely available on the GARP Digital Library.

AIMS:Joseph Hilyard. The Oil and Gas Industry: A Non-Technical Guide.

Chapter 1 .........................Origins of Oil and Gas

Candidates, after completing this reading, should be able to:

• Define and identify the three basic types of hydrocarbon traps.

• Define kerogen and understand how oil and gas is derived from kerogen in source rocks.

• Understand the ideal range of temperatures required for the natural creation of oil and gas.

• Understand the process of migration in the creation of oil reservoirs and define permeability and porosity.

• Summarize the unique characteristics of reservoir rock.

4 © 2013 Global Association of Risk Professionals. All rights reserved.


Chapter 2.........................Oil Overview


• Summarize the unique characteristics inherent in each major class of benchmark crude oil.

• Define “shale oil,” identify the most abundant/important geographic locations for shale oil reserves and

describe the techniques used to extract shale oil.

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

• Define an unconventional resource and understand the two most common types (tar sands and shale oil)

including the characteristics that make them different from conventional hydrocarbons.

• Describe the difference between proved, probable and possible reserves and apply the terms 1P, 2P and 3P.

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

• Define the term Barrel of Oil Equivalent (BOE) and understand its application.

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

Chapter 4 ........................Developing Oil and Gas Projects


• Describe the stage gate project development process and assess the steps required to reach a final

investment decision.

• Understand the concept of unitization and its relationship to the development of Joint Development

Zones (JDZs).

• Assess a project’s financial viability using Net Present Value (NPV) and Internal Rate of Return

(IRR) calculations.

• Identify pre-completion, post completion and macroeconomic risks in project development.

• Describe the role of contractors used by E&P firms in project development.

• Identify the major challenges that can arise during project development and assess their potential impact.

Charlotte Wright and Rebecca Gallun. Fundamentals of Oil & Gas Accounting, 5th Edition.

Chapter 1 .........................Upstream Oil and Gas Operations


• Understand the impact of subsurface geologic structures on oil and gas production.

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

• Differentiate between the acquisition and leasing of exploration and production rights.

• Summarize the technical aspects of drilling operations and identify various stages in the hydrocarbon

recovery process.

• Apply the offset clause, royalty payments and other lease provisions used in exploration and production

activities.

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


• Identify and apply the various fiscal systems used in global petroleum contracts including: concessionary

systems, contractual systems, production sharing or service contracts.

• Calculate the gross revenue payouts owed to each party in a concessionary system.

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

• Define profit oil and explain its application.

• Describe how a joint operating agreement works and understand the circumstances when it is used.

• Understand the primary accounting regulations that affect petroleum contracts.



Peter A. Nolan and Mark C. Thurber. On the State’s Choices of Oil Company: Risk Management and the Frontier

of the Petroleum Industry.


• Assess the strengths and weaknesses of National Oil Companies, Independent Oil Companies and Oil Service

Companies (NOCs, IOCs, and OSCs).

• Understand how the operational decisions of an oil company can be constrained by its risk appetite.

• Identify the factors that drive a state’s decision to financially exploit an oil resource, including the special risk

factors associated with “frontier” oil field development.

• Define a petroleum province and summarize the various risks associated with each stage of development of

a petroleum province.

• Understand how upstream and downstream structures and the integration of investment decisions affect the

risk profile of an oil company.

• Understand how oil price, water depth and history of previous findings at a site affect a state’s decision to

allocate a project to an NOC.

1.2 Crude Oil Transportation, Refining and Industry Trends

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

• Chapter 11 ....................Transportation

• Chapter 12 ...................Refining

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

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

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

Chapter 11........................Transportation


• Understand the various methods used to transport oil and gas.

• Explain the major steps in the construction of oil and natural gas pipelines.

• Identify key stakeholders in and barriers to pipeline design and construction.

• Describe the primary considerations, economic issues and decision process used for building a new pipeline,

including: safety issues, routing decisions and storage possibilities.

• Understand how different products are separated in a pipeline and describe batch cutting, over wash

and transmix.

• Identify demand-driven, supply-driven, and market-driven scenarios and know how they impact pipeline

development decisions.

• Using the BTC case as an example, identify political, economic and logistical challenges to the construction

of pipelines.

• Describe the different classifications and volume range of oil tankers.

• Understand the Worldscale pricing system and calculate transportation costs for a shipment of oil.

• Assess the trend in operational initiatives that has reduced the likelihood of oil spills over the last 40 years.



Chapter 12 .......................Refining


• Summarize the advantages and disadvantages of refinery operations managed by an IOC and independent

refinery.

• Understand the characteristics of the refining process including “cracking” and the various cracking processes.

• Describe the relationship between a refinery’s complexity, its choice of crude oil inputs, and its optimal

product mix.

• Summarize the operating characteristics of simple, complex and very complex refineries.

• Assess the economics of refinery operations including the relationship between the cost of crude oil and

refinery margins and the impact of a refinery’s complexity on its product mix and profit margin.

• Summarize the products produced and the impurities removed during the crude oil refining process.

• Apply the Nelson Complexity Index to assess refinery operations.

• Understand how a refinery’s barriers to exit impact its operating decisions.

• Identify common crack spreads like the 3:2:1 and the 6:2:3:1 NWE spreads, and calculate a crack spread given

input and output prices.

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

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


• Identify the factors that determine refinery complexity.

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

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

refining heavy crude oil.

1.3 Crude Oil Market Dynamics and Pricing

7. Bassam Fattouh. An Anatomy of the Crude Oil Pricing System (The Oxford Institute for Energy Studies).


AIMS:Bassam Fattouh. An Anatomy of the Crude Oil Pricing System (The Oxford Institute for Energy Studies).


• Summarize the process used to determine price differentials and identify factors that influence the

price differential.

• Understand the equivalence to the buyer principle.

• Define the “Platts window.”

• Describe the role of price reporting agencies (PRAs) in price identification; summarize the methodologies

used by PRAs to assess commodity prices, and identify criticisms of PRA price assessment.

• Explain the market conditions that led to the establishment of Brent as a benchmark crude.

• Understand the mechanics and specifications of the 21-day BFOE (Forward Brent), the Brent Futures, the

Exchange for Physical (EFP) and the Dated Brent/BFOE contracts.



• Define Contracts for Differences (CfDs) and understand its application when hedging basis risk associated

with Forward Brent contracts or deriving forward prices from a combination of Dated Brent prices and CfDs.

• Understand the relationship between futures contracts and physical supply.

• Compare and contrast the Brent, WTI, and Dubai-Oman crude oil benchmarks in terms of liquidity, price

transparency, and available financial products.

• Summarize the mechanics of WTI futures contracts including related delivery requirements, and compare

WTI Posting-Plus (P-Plus) pricing to NYMEX CMA pricing.

• Understand the logistical challenges that threaten the effectiveness of WTI as a global crude oil benchmark.

• Compare and contrast the price discovery process used by the two main PRAs in the Dubai market.

• Explain how the Dubai benchmark price can be calculated using swaps.

1.4 Natural Gas

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

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

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

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

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

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

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

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


• Summarize the standard heat and volumetric measurements for natural gas.

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

• Understand how natural gas is traded including common types of natural gas trades.

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

• Assess the relationship between spot and forward prices in the natural gas market.

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

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


• Describe the relationship between liquefied petroleum gas, natural gas liquids and condensates.

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

• Identify the common units of measure for natural gas.

• Describe how subsurface processes convert organic matter into hydrocarbons.

• Summarize the system for classifying reserves used by the Society of Petroleum Engineers.

• Calculate the gas/oil ratio for a given field.



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


• Summarize the fundamentals of natural gas pipeline transportation.

• Describe the benefits of liquefying natural gas.

• Understand empirical measures associated with liquefied natural gas (LNG) including the energy content

of LNG.

• Understand the economics of each stage of the LNG chain.

• Summarize the reasons why natural gas is stored.

• Compare and contrast the common structures used for storing natural gas.

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


• Understand the mechanics and terms of a gas sales agreement (GSA) including take-or-pay obligations,

nominations and force majeure.

• Compare the terms of the sale and purchase of LNG versus natural gas.

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

price using a crude oil index.

• Describe the process for developing a natural gas project, including the various types of contractual

agreements used.

1.5 Liquefied Natural Gas (LNG)

10. Inkpen and Moffett. The Global Oil and Gas Industry: Management, Strategy and Finance.

• Chapter 9.....................Liquefied Natural Gas (LNG)

11. PriceWaterhouseCoopers. Todays LNG Market Dynamics (May 2010).


AIMS:Inkpen and Moffett. The Global Oil and Gas Industry: Management, Strategy and Finance.

Chapter 9 ........................Liquefied Natural Gas (LNG)


• Identify regional trends in the global LNG trade.

• Summarize the business and financial arrangements used in LNG production and transportation.

• Understand the operation of an LNG train and describe the liquefaction process.

• Compare and contrast three types of shipping contracts: Free On Board (FOB), Cargo, Insurance and Freight

(CIF) and Delivered Ex Ship (DES).

• Describe the Gorgon LNG project in Australia and explain some of its specific challenges.



PriceWaterhouseCoopers. Todays LNG Market Dynamics.


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

floating production sites.

• Define the term “stranded gas.”

• Apply the methodology used for pricing natural gas in Asian markets.

• Understand why global LNG prices may converge to a single market price and why short-term contracts

are expected to become the industry standard.

1.6 Unconventional Products

12. Deutsche Bank. Oil and Gas for Beginners: A Guide to the Oil and Gas Industry (September 2010).

Sections on Canada’s Oil Sands, Gas-to-Liquids (GTL), Coal Bed Methane, and Tight & Shale Gas only.


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

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

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


AIMS:Deutsche Bank. Oil and Gas for Beginners: A Guide to the Oil and Gas Industry.

Sections on Canada’s Oil Sands, Gas-to-Liquids (GTL), Coal Bed Methane, and Tight & Shale Gas only.


• Describe how bitumen is extracted from oil sands via mining techniques and understand the conditions

where mining is possible.

• Compare and contrast the two methods of in-situ extraction, Steam Assisted Gravity Drainage (SAGD) and

Cyclic Steam Stimulation (CSS).

• Summarize the cost structure of oil sands development, including upfront, marginal and cash costs.

• Describe Gas-to-Liquids (GTL) technology and explain the benefits and drawbacks related to the

commercialization of GTL projects.

• Understand the Fischer-Tropsch (F-T) process for converting gas to liquid and identify the main commodities

produced in the GTL process.

• Describe coal bed methane (CBM), identify the locations of major CBM resources and summarize the process

for extracting gas from CBM.

• Understand tight gas and shale gas formations, identify where major tight and shale gas resources can be

found and describe the extraction process for each.

• Compare horizontal drilling and fracking.

• Describe the environmental considerations associated with CBM and tight gas and shale gas extraction.



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

Based Fuels: Economic and Environmental Trade-Offs.

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


• Identify the products produced from bitumen.

• Summarize the methods of bitumen extraction from oil-sands and potential constraints on the various

extraction methods.

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

1.7 Global Gas Price Formation

14. International Gas Union. Wholesale Gas Price Formation—A Global View of Price Drivers and Regional Trends.

(June 2011).

Sections: 1, 2, 3, 4, 5, 8, 9 and 10 only.


AIMS:International Gas Union.Wholesale Gas Price Formation—A Global View of Price Drivers and Regional Trends.

Sections: 1, 2, 3, 4, 5, 8, 9 and 10 only.


• Understand and apply the following natural gas pricing terms: wellhead price, border/beach price, hub price,

citygate price, end user price and netback price.

• Describe potential short, medium and long-term supply-side and demand-side drivers for natural gas prices.

• Summarize the eight key mechanisms for pricing gas and identify the geographic regions where each

mechanism is most prevalent.

• Summarize the recent development of regional trends in gas pricing mechanisms over time.

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

hypothetical market-clearing price.

• Identify the factors that influence the volatility of natural gas prices, including oil-linked prices.

• Assess the relationship between price volatility and natural gas supply across various hypothetical price levels.

1.8 Coal

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

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

AIMS:James Speight. Handbook of Coal Analysis.

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


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

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

• Describe the terms accuracy and precision in relation to coal sampling.

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



ELECTRICITY PRODUCTION AND DISTRIBUTION—Exam Weight | 10%

• Generation and Distribution of Power

• Practical Application of Electricity Spot Market Models

• Hydro and Nuclear Power Generation

Readings for Electricity Production and Distribution—16 Questions

2.1 Generation and Distribution of Power

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

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

• Chapter 4.2 .................The Generation Stack

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

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

(West Sussex, England: John Wiley & Sons, 2006).

• Chapter 7.....................Location Models (Sections 7.4 and 7.5 only)

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

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


• Summarize the elements of standard market design.

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

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

• Define nodes, zones, and hubs and explain their role in electricity distribution.

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

Chapter 4.2 .....................The Generation Stack


• Summarize the behavior of power providers in the generation stack.

• Define dispatch stack, understand its mechanics and explain how the clearing price of power is determined

by power providers in a dispatch stack.

• Compare and contrast day-ahead and real-time markets and summarize the advantages and disadvantages

of participating in each.

• Define baseload, mid-merit and peaking suppliers and summarize characteristics of each.

• Understand optimal bidding strategies and how bidding strategies result in cost discovery.

• Calculate the implied market heat rate for a generation stack.

• Describe how changes in fuel prices impact the generation stack and heat rates.

• Describe the impact of intermittent power producers on marginal power prices.



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


• Describe the role of a power marketer.

• Calculate the net profit of a tolling agreement.

• Describe the risks associated with a tolling agreement.

• Understand the dispatch rate and its application.

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

Chapter 7.........................Location Models (Sections 7.4 and 7.5 only)


• Describe why locational issues are important for electrical systems; summarize the requirements for

locational pricing.

• Understand the zonal, nodal, and postage stamp pricing models and the role of financial transmission rights

in the distribution of electricity.

2.2 Practical Application of Electricity Spot Market Models

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

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

4. PJM Interconnection. How RTOs Establish Spot Market Prices (September 2007).


5. Henry Louie and Kai Strunz. Locational Marginal Pricing in North American Power Systems.


6. PJM Interconnection. Financial Transmission Rights (July 2009).

Sections 1, 2, 6 and 8 only.

7. Nord Pool Spot. The Nordic Electricity Exchange and Model for a Liberalized Electricity Market.


AIMS:Sally Hunt. Making Competition Work in Electricity.

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


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

• Describe the impact of demand response.

• Define constraint and its effect on electricity markets.

• Understand congestion management and calculate congestion costs.

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



PJM Interconnection. How RTOs Establish Spot Market Prices.


• Describe the role of a Regional Transmission Organization (RTO) in the operation of a deregulated electricity

market, particularly the spot market.

• Understand how uniform price auctions operate and how they establish retail electricity prices in a

deregulated market.

• Compare a set of auction bids and determine how they affect an RTO’s purchase and dispatch decisions.

• Describe the term least-cost and explain how it affects the spot price in a deregulated electricity market.

• Assess congestion on an electric grid and explain how it affects an RTO’s operational decisions.

• Describe how generators operating in reserve affect spot electricity prices.

Henry Louie and Kai Strunz. Locational Marginal Pricing in North American Power Systems.


• Explain the locational marginal pricing (LMP) structure.

• Understand how congestion affects electricity prices, and how LMP pricing is employed to reduce

congestion costs.

• Calculate the LMP given a set of market data and electric grid constraints.

PJM Interconnection. Financial Transmission Rights.

Sections 1, 2, 6 and 8 only.


• Explain how Financial Transmission Rights (FTRs) are used to manage congestion on an electric grid.

• Calculate the value of an FTR when given a set of market and grid parameters.

• Define Auction Revenue Rights (ARR), and explain their valuation in relation to FTRs.

• Identify the types of FTRs offered and explain how each is used to manage congestion within the system.

• Describe how winning bids in an FTR auction are determined and how FTR clearing prices are set.

• Calculate an FTR settlement given day-ahead price quotes and other market information.

Nord Pool Spot. The Nordic Electricity Exchange and Model for a Liberalized Electricity Market.


• Identify the stakeholders in a liberalized electricity market.

• Describe the role and duties of the Transmission System Operator (TSO) in a deregulated market.

• Summarize the process a TSO uses to manage supply and demand on the electric grid.

• Calculate the settlement (payment) for a quantity of dispatched/consumed power under NORD Pool rules.

• Understand how up-regulation and down-regulation pricing ensures efficient operation of the NORD

Pool market.



2.3 Hydro and Nuclear Power Generation

8. Tom Fogarty and Robert Lamb. Investing in the Renewable Power Market.

(Hoboken, NJ: John Wiley & Sons, Inc., 2012).

• Chapter 14...................Nuclear

• Chapter 15 ...................Hydropower

AIMS:Tom Fogarty and Robert Lamb. Investing in the Renewable Power Market.

Chapter 14.......................Nuclear


• Compare the cost structure of nuclear plants to other sources of energy.

• Understand the economics of a geological disposal facility (GDF).

• Describe how global nuclear policy changed after the Fukushima incident.

• Explain the importance of the Chinese market in next-generation nuclear power plant development.

Chapter 15 .......................Hydropower


• Understand the economic challenges faced by U.S. hydro power producers.

• Describe the operations and maintenance cost associated with hydro plants.

• Identify the common cost structures and financial outlays associated with hydropower plant operations.

• Understand the availability of hydropower relative to other renewable power sources.



RENEWABLE ENERGY—Exam Weight | 10%

• Overview of Renewable Markets

• Wind and the European Electricity Market

• Project Finance for Renewable Energy

• Trends in Carbon Pricing and Emissions Trading

Readings for Renewable Energy—16 Questions

3.1 Overview of Renewable Markets

1. Geoffrey Heal. The Economics of Renewable Energy (2009).


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

Sections 1, 2, 3, 4 and 5 only.


3. Tom Fogarty and Robert Lamb. Investing in the Renewable Power Market


• Chapter 16 ...................Geothermal

AIMS:Geoffrey Heal. The Economics of Renewable Energy.


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

fossil fuel based projects.

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

• Identify the four parameters used to assess investment in renewable projects.

• Calculate the capacity factor for a wind or solar plant given a set of market parameters.

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

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

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

markets.

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

Sections 1, 2, 3, 4 and 5 only.


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

• Identify countries that produce the greatest volume of ethanol and other biofuels.

• Describe the current and potential future drivers of international biofuel trade.

• Describe the cost structure associated with biofuel production.



Tom Fogarty and Robert Lamb. Investing in the Renewable Power Market.

Chapter 16.......................Geothermal


• Compare the relative advantages and disadvantages of dry steam and flash steam technologies.

• Define a binary-cycle geothermal power plant and understand its advantages.

• Explain geothermal “hot spots,” understand what geological conditions create them, and their relevance to

geothermal power.

• Describe direct-exchange and closed-loop geothermal heat pump systems and compare the strengths and

weaknesses of each.

• Understand Enhanced Geothermal Systems (EGS) and their risks.

3.2 Wind and the European Electricity Market: A Practical Application of Renewable Power

4. European Wind Energy Association. The Economics of Wind Energy (March 2009).


5. European Wind Energy Association. Creating the Internal Energy Market in Europe (September 2012).


AIMS:European Wind Energy Association. The Economics of Wind Energy.


• Compare the typical expense structures for onshore and offshore wind turbine installations.

• Compare the cost structure of wind generation to conventional carbon-based generation.

• Understand the main components of wind turbine installations and identify the technical factors that

determine turbine pricing.

• Understand and compare the relative strengths and weaknesses of factors used to measure the productivity

of a wind turbine installation.

• Construct and interpret a power curve, and explain the relationship between wind speeds and a wind

turbine’s production.

• Describe the geographical factors that impact the productivity of a wind turbine.

• Understand the tradeoffs between capacity factor and installation costs.

• Identify and assess the risks associated with wind project development and explain methods for risk mitigation.

• Identify and compare the economic incentives for wind generation and assess examples of each.

• Understand the operating mechanics of quantity-based market schemes including green certificate models

and renewable energy tenders.

• Understand the relationship between wind power production and balancing costs.

• Explain the relative price level at which wind power enters the power supply curve, and its impact on spot

electricity prices.

• Understand the relationship between the regulatory treatment of externalities and the choice of technology

used in energy production.

• Define the oil-GDP effect and explain how renewable energy can mitigate its impact.



• Distinguish between “uncertain” and “unpredictable” in the context of fuel prices and explain the implications

with respect to modeling fuel price risks.

• Summarize the benefits of the market-based approach to modeling cost of electricity (COE) and explain why

the market based-model may be preferable in capturing fuel price risk.

European Wind Energy Association. Creating the Internal Energy Market in Europe.


• Understand the merit order effect in the electricity spot market and explain how wind power supply impacts

the market clearing price of power during periods of high and low wind speed.

• Describe the advantages of an intraday market for power generators and system operators.

• Explain the mechanics of the balancing market and differentiate between a single-price and a dual-price

imbalance mechanism.

• Identify risks faced by wind power generators and explain how government incentives shield wind producers

from these risks.

• Define market coupling and differentiate between price coupling and volume coupling.

• Describe the mechanics of coupling and understand how the process of coupling reduces the volatility of

energy prices.

• Describe the roadmap for the implementation of coupling in the EU.

• Define the capacity credit of wind power and understand the relationship between capacity credit and

trading zone size.

3.3 Project Finance for Renewable Energy

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

Clean Tech Projects (August 2010).


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

Clean Tech Projects.


• Describe project finance, and explain the structure of a typical project finance agreement.

• Differentiate between project finance and merchant finance.

• Understand the importance of power purchase agreements (PPAs) in securing project finance.

• Identify the primary stakeholders in a project finance agreement.

• Identify key financial and operational conditions under which it would be advantageous to enter into a

project financing agreement.

• Describe the process of raising equity for a renewable project.

• Compare different loan structures which can be used to raise project debt for a renewable project.

• Explain how project revenues are distributed to stakeholders (i.e. the project “waterfall”).

• Describe key U.S. government incentive structures for renewable energy projects, including production tax

credits (PTCs), investment tax credits (ITCs), and accelerated depreciation.

• Explain the tax structures used to monetize available project subsidies.



3.4 Trends in Carbon Pricing and Emissions Trading

7. Joseph E. Aldy and Robert N. Stavins. The Promise and Problems of Carbon Pricing: Theory and Experience

(Harvard Environmental Economics Program, October 2011).


8. Larry Parker. Climate Change and the EU-Emissions Trading Scheme (ETS): Looking to 2020

(U.S. Congressional Research Service, January 2010).


AIMS:Joseph E. Aldy and Robert N. Stavins. The Promise and Problems of Carbon Pricing: Theory and Experience.


• Compare and contrast the technology-based and performance-based standards associated with climate

change policy.

• Identify the critical elements to be considered when implementing a cap-and-trade system.

• Understand the mechanics of an emission-reduction credit (ERC) system.

• Assess the impact of potential cuts in fossil fuel subsidies on global oil consumption.

• Understand the mechanics by which the Kyoto Protocol’s Clean Development Mechanism (CDM) can motivate

greenhouse gas reductions in developing countries.

• Describe measures that can be implemented to allow international coordination of climate change policies.

Larry Parker. Climate Change and the EU-Emissions Trading Scheme (ETS): Looking to 2020.


• Describe the ETS system; assess the greenhouse gas reduction commitment under the ETS and identify the

industries covered.

• Understand how an auction system can address the issue of windfall profits that often accrue to power

producers under a cap and trade program like the ETS.

• Identify key changes to be implemented in Phase III of the ETS, and identify the regions where free carbon

allowances will be permitted in phase III of the ETS.

• Understand how carbon allowances will be phased out for non-power producing industries under phase III

of the ETS.

• Describe the EU ETS provisions that will support industries in energy intensive, trade-exposed areas.

• Summarize the major challenges faced by the EU in its implementation of the ETS program and explain how

these lessons could be applied to the potential implementation of a cap and trade program in the U.S.



FINANCIAL PRODUCTS AND RISK MANAGEMENT

FINANCIALLY TRADED PRODUCTS—Exam Weight | 15%

• Forwards and Exchange Traded Futures

• Energy Commodity Swaps

• Energy Options

• Exotic Options and Structured Products

• Hedging Energy Commodity Risk

• Spread Trading in Energy Commodities

• OTC Derivative Trade Process

• Real Options

Readings for Financially Traded Products and Real Options—24 Questions

4.1 Forwards and Exchange Traded Futures

1. Helyette Geman. Commodities and Commodity Derivatives, Modeling and Pricing for Agriculture, Metals and

Energy (New York, NY: John Wiley & Sons, Inc., 2005).

• Chapter 1......................Futures (Sections 1.1, 1.2, 1.3 and 1.4 only)

2. Robert McDonald. Derivatives Markets 3rd Edition (Boston, MA: Addison-Wesley, 2013).

• Chapter 5.....................Financial Forwards and Futures Contracts (Section 5.4 only)

• Chapter 6.....................Commodity Forwards and Futures (Sections 6.1, 6.2, 6.3, 6.6, 6.7 and 6.8 only)

AIMS:Helyette Geman. Commodities and Commodity Derivatives, Modeling and Pricing for Agriculture,

Metals and Energy.

Chapter 1 .........................Futures (Sections 1.1, 1.2, 1.3 and 1.4 only)


• Understand the major risks associated with energy commodity spot transactions.

• Distinguish between ordinary and extraordinary transportation risks.

• Differentiate between spot, forward, and futures transactions, markets, and contracts.

• Explain the roles of hedgers, speculators, and arbitrageurs in commodity markets.

• Explain the conditions for a market to be arbitrage-free.

• Define and calculate basis risk, and the variance of the basis.

• Describe and assess a strategy to hedge basis risk for an energy commodity or energy commodity portfolio.

• Differentiate between an Exchange for Physical and an Alternative Delivery Procedure.

Robert McDonald. Derivatives Markets 3rd Edition.

Chapter 5 ........................Financial Forwards and Futures Contracts (Section 5.4 only)


• Understand the mechanics of a futures position and calculate the margin requirements and profit on an open

futures contract.

• Explain the circumstances under which you would be required to post additional margin (a “margin call”).

• Understand how the mechanics of a futures contract may cause forward and futures prices to diverge.



Chapter 6 ........................Commodity Forwards and Futures (Sections 6.1, 6.2, 6.3, 6.6, 6.7 and 6.8 only)


• Define the following terms: storage costs, carry markets, lease rate, and convenience yield.

• Explain the basic equilibrium formula for pricing commodity forwards.

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

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

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

prices and no-arbitrage bounds.

• Compute the forward price of an energy commodity with storage costs.

• Identify factors that impact electricity, natural gas, and oil forward prices.

• Calculate a commodity spread.

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

risk management.

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

forward price and the expected future spot price.

• Explain weather risk and the use of weather derivatives as a risk management tool.

• Define heating degree days (HDD) and cooling degree days (CDD) and calculate each using a baseline

temperature.

4.2 Energy Commodity Swaps

3. McDonald. Derivatives Markets, 3rd Edition.

• Chapter 8.....................Swaps (Sections 8.1 and 8.2 only)

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

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

5. Fletcher Sturm. Trading Natural Gas, Cash, Futures, Options and Swaps (Tulsa, OK: Pennwell, 1997).

• Chapter 4 ....................(Sections on Basis Swaps, Index Swaps, Swing Swaps and Exchange for Physicals only)

AIMS:McDonald. Derivatives Markets, 3rd Edition.

Chapter 8 ........................Swaps (Sections 8.1 and 8.2 only)


• Describe the mechanics of swaps and the relationship between counterparties.

• Compare prepaid swaps and prepaid forwards.

• Calculate a periodic swap settlement payment for a multiyear energy commodity swap given forward prices

and interest rates.

• Explain how the market value of a swap changes over time and describe factors affecting a swap’s

market value.

• Explain how an implicit lending agreement is contained in a swap and describe how the interest rate is

derived from an interest rate forward curve.



Vincent Kaminski (ed). Managing Energy Price Risk.

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


• Summarize the types of swap transactions associated with energy commodity markets and describe various

scenarios in which a swap may be employed.

• Calculate the settlement for various types of swap contracts.

• Describe the benefits and challenges faced by the end-user in various energy swap transactions.

• Explain how swap transactions in the energy markets are different than other swaps in other financial or

commodity markets.

• Understand the role of swaps in energy financing structures.

• Describe examples of cross-commodity hedging, specifically the process of hedging jet fuel with crude oil.

Fletcher Sturm. Trading Natural Gas, Cash, Futures, Options and Swaps.

Chapter 4 ........................(Sections on Basis Swaps, Index Swaps, Swing Swaps and Exchange for Physicals only)


Basis and Index Swaps

• Define basis and the forward basis differential as it refers to the natural gas market, and understand the

mechanics of a basis swap.

• Explain the reasons participants enter into basis swaps.

• Calculate the settlement and profitability of a basis swap.

• Understand the factors that affect basis differentials.

• Summarize the mechanics of index swaps and the rationale for entering into an index swap or fixed-float

index swap.

• Calculate the settlement and profitability of a fixed-float index swap.

Swing Swaps

• Describe the mechanics of swing swaps and provide examples of hedging transactions using swing swaps.

• Explain the benefits of using a baseload contract when hedging swing swaps.

• Explain how swing swaps can be used in calendar spread trading.

Exchange for Physical (EFP)

• Define an EFP contract and describe the mechanics of an EFP transaction.

• Explain how buyers and sellers can achieve different effective prices for the same physical gas by using

an EFP.

• Calculate the settlement, profitability and effective price for an EFP transaction.

• Demonstrate how an EFP can be converted into physical index gas, fixed-price physical gas, a futures swap,

or a basis swap.



4.3 Energy Options

6. Kaminski (ed). Managing Energy Price Risk.

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

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

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


• Define plain vanilla options; understand the mechanics of call and put options.

• Explain put/call parity and understand its relationship to future and forward prices.

• Define the terms intrinsic value and time value and understand their application.

• Explain the difference between American, Asian and European options.

• Describe delta hedging and understand how an option delta is derived.

• Understand and apply the concepts of theta, gamma, vega, and rho for option positions.

• Identify the key inputs for an energy commodity option pricing model; understand the impact that each has

on the calculation of the price.

• Define caps, collars and floors and understand their application.

• Calculate a bull and/or bear spread.

4.4 Exotic Options and Structured Products

7. Kaminski (ed). Managing Energy Price Risk.

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

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

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


• Compare exotic options to plain vanilla options.

• Calculate the settlement of an exotic option.

• Understand how exotic options are valued.

• Describe the importance of correlation in valuing options on two or more commodities.

• Identify and assess path dependent options.

• Understand the market conditions where multi-commodity options would be used to hedge risk exposures.

• Define daily options and take-or-pay options.



4.5 Spread Trading in Energy Commodities

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

(Tulsa, OK: PennWell Books, 2002).

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

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

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


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

• Understand intermarket spreads and their application.

• Define crack and spark spreads, understand how they are derived and explain their application.

4.6 OTC Derivative Trade Process

9. Nichole Framularo. OTC Commodity Derivatives Trade Processing Lifecycle Events (ISDA Working Paper, April 2012).


AIMS:Nichole Framularo. OTC Commodity Derivatives Trade Processing Lifecycle Events.


• Understand the key features of the OTC commodity derivatives market.

• Summarize the steps involved in processing an OTC trade and understand the action required in each step

(Trade Capture, Controls Processing, etc.).

• Identify the market pricing services used to settle OTC energy contracts (i.e. PlattsGas Daily) and understand

how physical delivery may impact the settlement value.

• Explain the importance of automation (i.e. “straight-through-processing”) in clearing OTC energy trades;

describe the benefits and weaknesses of a settlement matching process.

• Describe how OTC clearing affects market transparency.

4.7 Real Options

10. McDonald. Derivatives Markets, 3rd Edition.

• Chapter 17 ...................Real Options

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

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




AIMS:McDonald. Derivatives Markets, 3rd Edition.

Chapter 17 .......................Real Options


• Define real options and compare a real option to invest in a physical investment project to a financial call option.

• Apply the NPV rule for making investment decisions.

• Calculate risk-neutral probabilities associated with a project and the value of a project using a binomial tree.

• Relate real option investment decisions to their analogous option strategies.

• Explain why the economic payoff from a peak-load plant is similar to a spread option.

• Describe why the option to abandon a project at multiple stages can be valuable.

• Explain how real options may allow a project to be accepted even though its static NPV is negative.

• Calculate the value of a project that includes an option to delay investment.

• Explain how price uncertainty and volatility affect a project’s optimal timing.

• Describe how an option to shut down and an option to restart production affect the valuation of a project.

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

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

Unlocking the Value of Real Options.


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

• Explain how oil companies specifically use real option valuation.

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

• Identify the real options choices used in energy projects and the circumstances in which they are applied.



PRICE FORMATION, MARKET RISK AND VALUATION—Exam Weight | 15%

• Fundamental Probability, Statistics and Modeling Principles

• Energy Spot Price Formation

• Energy Forward Curves

• Modeling Energy Forward Curves

• Energy Price Volatility

• Market Risk Evaluation

• Financial Option Valuation Models

Readings for Price Formation, Market Risk and Valuation—24 Questions

5.1 Fundamental Probability, Statistics and Modeling Principles

1. Michael Miller. Mathematics and Statistics for Financial Risk Management


• Chapter 2.....................Probabilities

• Chapter 3.....................Basic Statistics

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

(New York, NY: McGraw Hill, 2007).

• Chapter 3.....................Modeling Principles and Market Behavior (Sections 3.6 and 3.7 only)

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

AIMS:Michael Miller. Mathematics and Statistics for Financial Risk Management.

Chapter 2.........................Probabilities


• Define continuous and discrete random variables.

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

cumulative distribution function.

• Distinguish between independent and mutually exclusive events.

• Define joint probability, describe a probability matrix and calculate joint probabilities using probability matrices.

• Define and calculate a conditional probability, and distinguish between conditional and unconditional

probabilities.

• Understand and apply Bayes’ Theorem.

Chapter 3.........................Basic Statistics


• Define, calculate, and interpret the mean, standard deviation, and variance of a random variable.

• Define, calculate, and interpret the covariance and correlation between two random variables.

• Calculate and interpret the variance for a portfolio and understand the derivation of the minimum variance

hedge ratio.

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

• Interpret the skewness and kurtosis of a statistical distribution.



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

Chapter 3.........................Modeling Principles and Market Behavior (Sections 3.6 and 3.7 only)


• Define the elements of an energy price model.

• Define convenience yield and identify short-term and long-term factors that affect the convenience yield.

• Define and calculate the cost of risk.

• Describe the characteristics of a lognormal and mean-reverting model.

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


• Describe the characteristics and application of a time series analysis and distribution analysis.

• Differentiate between normal and lognormal distributions and their application.

• Differentiate and explain the application of statistical tests used in data analysis including the Q-Q plot,

autocorrelation test, mean-squared error and R-squared error.

• Understand how statistical tools are used to assess the effectiveness of energy price models.

5.2 Energy Spot Price Formation

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

(London: Lacima Publications, 2000).

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

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

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

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

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


• Define mean reversion and understand its impact on spot price formation.

• Identify modifications to the Black-Scholes-Merton model required to better replicate energy spot price behavior.

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

how jumps can be simulated.

• Describe how seasonality is accounted for in energy spot price estimation.

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

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


• Differentiate between a lognormal price model and mean-reverting model; compare the effectiveness of

each in explaining energy spot price behavior.

• Explain the process of calibrating parameters using time series analysis and understand the impact of

seasonality adjustments on spot price models.

• Describe the weakness in using a single-factor mean-reverting model to value longer term options.

• Understand how distribution analysis is used to assess the effectiveness of an energy spot price model.



5.3 Energy Forward Curves

5. Clewlow and Strickland. Energy Derivatives: Pricing and Risk Management.

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


• Chapter 6.....................The Forward Price Curve (Sections 6.1, 6.2, 6.3, 6.4 and 6.5 only)

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


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

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

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


• Compare the cost of carry in a conventional financial futures contract and an energy futures contract.

• Identify the challenges in constructing an energy forward curve.

• Explain why forward electricity curves are different from other energy commodities and summarize the

approaches used to model electricity price data.

• Understand the relationship between the heat rate, input fuel prices and electricity forward curve.


Chapter 6 ........................The Forward Price Curve (Sections 6.1, 6.2, 6.3, 6.4 and 6.5 only)


• Differentiate between forward and futures contracts.

• Understand the relationship between correlation, margin accounts and forward and future pricing.

• Define contango and backwardation.

• Identify how market factors like seasonality impact the following energy forward curves: crude oil, heating

oil, natural gas, and power.

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

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


• Identify the factors used to derive a commodity forward curve.

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

• Define Principal Components Analysis (PCA).

• Apply the results of a PCA to interpret the change in level, slope, and curvature of a forward curve.

• Summarize technical forward curve indicators and their application.



5.4 Energy Price Volatility


• Chapter 3.....................Volatility Estimation in Energy Markets (Sections 3.1 and 3.2 only)


• Chapter 8.....................Volatilities (Sections 8.1, 8.2, 8.3, 8.4 and 8.5 only)


Chapter 3.........................Volatility Estimation in Energy Markets (Sections 3.1 and 3.2 only)


• Summarize the practical challenges of modeling energy price behavior.

• Estimate volatility using historical price data.

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

process.

• Understand how volatility is scaled including the rational for annualizing price volatility in energy markets.

• Describe the market convention used to derive implied volatility.

• Define volatility smile, explain how it is derived and understand its relationship to implied volatility.

• Identify the weaknesses in applying the Geometric Brownian Motion (GBM) process to energy markets.

• Define homoskedastic, heteroskedastic and leptokurtic.

• Define ARCH and GARCH models and understand their application.


Chapter 8 ........................Volatilities (Sections 8.1, 8.2, 8.3, 8.4 and 8.5 only)


• Define volatility and explain the relationship between volatility, standard deviation and variance.

• Define market-implied volatility and understand how option implied volatilities are derived.

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

• Explain how caplets can be used to determine a volatility term structure.

5.5 Market Risk Measurement and Management


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

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

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

Economics (June 9-12, 1999).


12. Louis Guth and Kristina Sepetys. Value at Risk: Variations on a Theme (Global Energy Business (May/June 2001).




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

(Institutional Investor, Inc. Spring 2001).


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

• Chapter 12 ...................Liquidity and Leverage (Sections 12.4, 12.5 and 12.6 only)

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

• Chapter 13 ...................Effective Risk Management Strategies for Commodity Portfolios

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



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


• Define Value-at-Risk (VaR).

• Compare and contrast the Simple Moving Average (SMA) and Exponentially Weighted Moving Average

(EWMA) method of calculating VaR and provide advantages and disadvantages of each.

• Describe the decay factor in the EWMA model and explain considerations for selecting the decay factor.

• Describe the limitations of VaR as a risk management tool and explain how VaR is calculated for different

confidence levels.

• Calculate the VaR of a two-security portfolio given the correlation coefficient, and explain the relationship

between correlation and VaR.

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

Carlo simulations.

• Understand, summarize and interpret the methodologies for backtesting VaR.

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

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


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

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

• Summarize the market conditions that lead to the logical use of VaR as a risk measure for energy commodities.



Louis Guth and Kristina Sepetys. Value at Risk: Variations on a Theme.


• Compare Cashflow at Risk (C-far), Earnings-at-Risk (EaR), and Profit-at-Risk (PaR).

• Describe the purpose of cash flow mapping.

• Describe extreme value theory (EVT) and explain the process and benefits of using EVT in the calculation

of VaR.

• Explain reasons why PaR is superior to VaR in managing risk at energy firms such as electricity producers.

• Define the breakpoint associated with physical energy delivery and compare the assumptions inherent in

PaR and VaR calculations with respect to the breakpoint.

• Describe how EaR is calculated and explain how hedging decisions are captured in an EaR framework.

• Explain how the C-far model can be used in strategic planning, investor communications and risk management.

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


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

conjunction with Value-at-Risk models.

• Identify the three main types of stress tests.

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

• Discuss the shortcomings of stress testing.

Allan Malz, Financial Risk Management: Models, History, and Institutions.

Chapter 12 .......................Liquidity and Leverage (Sections 12.4, 12.5 and 12.6 only)


• Define and differentiate between sources of liquidity risk, including transactions liquidity risk, balance

sheet/funding liquidity risk and systemic risk.

• Describe the characteristics used to measure market liquidity, including tightness, depth and resiliency, and

understand how a lack of liquidity manifests itself in market behavior and pricing.

• Identify the main sources of transactions liquidity risk.

• Calculate the expected transactions cost and the 99 percent spread risk factor for a given transaction.

• Calculate the liquidity-adjusted VaR for a given position to be liquidated over a specified number of

trading days.

• Understand the relationship between systemic risk and liquidity.

Frank Fabozzi. The Handbook of Commodity Investing.

Chapter 13 .......................Effective Risk Management Strategies for Commodity Portfolios


• Explain the importance of incorporating market data into risk assessments.

• Describe how risk events can affect inter-commodity correlations.

• Apply Front Month Equivalents (FME) in stress test scenarios for a given set of inputs.

• Calculate the Market Impact cost for a hypothetical position.

• Explain the potential impact of operational risk on an energy commodity portfolio.



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


• Explain the reasons for the collapse of Amaranth Advisors LLC.

• Describe the mechanics and rationale for the long winter, short non-winter trading strategy used by Amaranth.

• Explain how Amaranth was able to maintain a net position above NYMEX position limit guidelines and

summarize its implications.

• Explain the relative impact of market risk and liquidity risk on Amaranth’s portfolio.

• Describe the role of funding risk in Amaranth’s collapse.

5.6 Option Valuation Models


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

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

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


• Describe the strengths and weaknesses of using closed-form models to value options.

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

• Explain how modeling limitations can lead to volatility smiles.

• Calculate the value of an option using a binomial or trinomial tree.



CREDIT AND COUNTERPARTY RISK—Exam Weight | 10%

• Credit and Counterparty Risk Assessment and Management

• Fundamentals of Central Counterparty Clearing

Readings for Credit and Counterparty Risk—16 Questions

6.1 Credit and Counterparty Risk Assessment and Management

1. Fraser and Simpkins. Enterprise Risk Management: Today’s Leading Research and Best Practices for

Tomorrow’s Executives (Hoboken, NJ: John Wiley & Sons, 2010).

• Chapter 15 ...................Credit Risk Management

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

Markets (West Essex, England: John Wiley & Sons, 2007).

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

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

• Chapter 6.....................Credit and Counterparty Risk

4. Jon Gregory, Counterparty Credit Risk: The New Challenge for Global Financial Markets

(West Sussex, UK: John Wiley & Sons, 2010).

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

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

• Chapter 4 ....................Quantifying Counterparty Exposure I (Sections 4.1 and 4.2 only)

• Chapter 5.....................Quantifying Counterparty Exposure II

• Chapter 7.....................Pricing Counterparty Credit Risk I (Sections 7.1 and 7.2 only)

• Chapter 8.....................Pricing Counterparty Credit Risk II (Sections 8.1, 8.2 and 8.3 only)

AIMS:Fraser and Simpkins. Enterprise Risk Management: Today’s Leading Research and Best Practices for

Tomorrow's Executives.

Chapter 15 .......................Credit Risk Management


• Perform a fundamental credit risk assessment for a given a set of parameters.

• Define Current Ratio, Quick Ratio, Burn Rate, Days Cash on Hand and Debt Ratio; understand their application

in fundamental credit analysis.

• Understand how credit ratings are set and their implications on the ability of an entity to borrow money and

raise capital.

• Explain the Altman Z-score, and understand its application and limitations.

• Identify and apply techniques to mitigate credit risk.



Burger, Graeber, and Schindlmayr. Managing Energy Risk: An Integrated View on Power and Other

Energy Markets.

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


• Define and understand the relationship between settlement risk and replacement risk and how each

is calculated.

• Summarize external credit ratings and related default probabilities.

• Identify common internal rating factors and explain their application.

Allan Malz, Financial Risk Management: Models, History, and Institutions.

Chapter 6 ........................Credit and Counterparty Risk


• Differentiate between the book and market value of a firm’s capital structure.

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

• Identify common frictions that arise when using credit contracts.

• Define default events, probability of default, credit exposure, and loss given default.

• Calculate expected loss, the loss given default, and the probability of default for a given scenario.

• Differentiate between a credit risk event and a market risk event.

• Summarize credit assessment tools such as credit ratings, rating migration, internal ratings, and credit risk

models.

• Define counterparty risk, and understand how counterparty risk is different from credit risk.

• Understand the Merton Model and use it to calculate a firm’s value (including debt and equity) and default

probability.

• Define Credit VaR (Value-at-Risk).

Jon Gregory, Counterparty Credit Risk: The New Challenge for Global Financial Markets.

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


• Define counterparty risk and explain how it differs from lending risk.

• Identify types of transactions that carry counterparty risk.

• Define credit exposure, credit migration, recovery, mark-to-market, replacement cost, asymmetric exposure,

and potential future exposure.

• Describe the different ways institutions can manage or mitigate counterparty risk.

• Summarize how counterparty risk is quantified and briefly describe credit value adjustment (CVA).

• Summarize how counterparty risk is hedged and explain the important factors used to assess capital

requirements for counterparty risk.

• Understand the following metrics for credit exposure: expected mark-to-market, expected exposure, potential

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



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


• Differentiate between a two-way and one-way agreement, and explain the purpose of an ISDA master

agreement and credit support annex (CSA).

• Understand the mechanics of termination and walkaway provisions in credit contracts.

• Summarize netting and close-out procedures (including multilateral netting), explain their advantages and

disadvantages, and describe how they fit into the framework of the ISDA master agreement.

• Describe the effectiveness of netting in reducing credit exposure under various scenarios.

• Define collateralization and explain the mechanics of the collateralization process, including the role of a

valuation agent, the types of collateral that are typically used, and reconciliation of collateral disputes.

• Summarize the features of a collateralization agreement including links to credit quality, margins and call

frequency, thresholds, minimum transfers, rounding, haircuts, interest, and rehypothecation.

Chapter 4 ........................Quantifying Counterparty Exposure I (Sections 4.1 and 4.2 only)


• Understand the techniques used to quantify credit exposure: add-ons, semi-analytical methods, and Monte

Carlo simulation.

• 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.

Chapter 5 ........................Quantifying Counterparty Exposure II


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

• Understand and assess the risk associated with the remargining period.

• Understand the assumptions and parameters involved in modeling collateral.

• Summarize the risks associated with a collateral agreement.

Chapter 7.........................Pricing Counterparty Credit Risk I (Sections 7.1 and 7.2 only)


• Explain the motivation for and challenges of pricing counterparty risk.

• Define credit value adjustment (CVA) and calculate CVA assuming wrong-way risk does not exist.

• Summarize the process used to approximate the CVA spread.

• Describe how collateralization and netting affect the CVA price.

Chapter 8 ........................Pricing Counterparty Credit Risk II (Sections 8.1, 8.2 and 8.3 only)


• Define wrong-way risk: explain the origins of wrong-way risk and identify situations where wrong-way risk

is present.

• Identify examples of right-way risk (right-way exposure).

• Explain how trades involving the following financial products can introduce wrong-way risk: put options,

commodity swaps and credit default swaps.

• Understand the relationship between wrong-way risk and counterparty credit quality.

• Compare different approaches used to measure wrong-way risk.

• Explain the general relationship between correlation and option pricing for put and call options across

various strike prices.



6.2 Fundamentals of Central Counterparty Clearing

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


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


• Understand the role of a Central Counterparty (CCP) in clearing financial transactions, particularly the effect

a CCP has on risk allocation.

• Define netting, collateralization, insurance, equity, and mutualization; understand their application.

• Explain how a CCP manages a default, particularly how netting is employed in such a circumstance.

• Describe the process of novation.

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

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

• Understand how proposed regulation such as Dodd-Frank or EMIR will impact the role of the CCP in

market operation.

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

• Explain how CCPs may create moral hazard among market participants.

• Understand the importance of liquidity in managing risk and replacing defaulted positions.

• Identify the risks that affect the cost of clearing a derivative product.

• Summarize the financial “waterfall” used by a CCP to absorb a default.



OPERATIONAL RISK AND STRATEGIC RISK MANAGEMENT—Exam Weight | 10%

• Operational Risk Evaluation

• Strategic Risk Management and Corporate Governance

• Ethics and the GARP Code of Conduct

Readings for Operational Risk and Strategic Risk Management —16 Questions

7.1 Operational Risk Evaluation

1. Fraser and Simpkins. Enterprise Risk Management: Today’s Leading Research and Best Practices for

Tomorrow’s Executives (Hoboken, NJ: John Wiley & Sons, 2010).

• Chapter 8.....................Identifying and Communicating Key Risk Indicators

• Chapter 16 ...................Operational Risk Management

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

Economics of Firm Organization and Safety (January 2011).


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


4. Robert Bea, Ian Mitroff, Daniel Farber, Howard Foster and Karlene H. Roberts. A New Approach to Risk:

The Implications of E3 (Palgrave Macmillan 2009).


5. Senior Supervisors Group. Observations on Developments in Risk Appetite Frameworks and IT Infrastructure

(December 2010).


AIMS:Fraser and Simpkins. Enterprise Risk Management: Today’s Leading Research and Best Practices for

Tomorrow’s Executives.

Chapter 8 ........................Identifying and Communicating Key Risk Indicators


• Explain the potential impact that operational risk can have on an organization.

• Describe the difference between “good risk” and “reckless risk.”

• Define risk tolerance and risk appetite; explain their effect on the risk management strategy of an organization.

• Identify and explain the elements of an effective risk management strategy.

• Describe the Bowtie Model of risk assessment; explain its associated strategies and actions.

• Summarize the selection criteria for managing risk in a given scenario.



Chapter 16.......................Operational Risk Management


• Define Key Risk Indicators (KRIs) and explain their application in risk management.

• Explain the difference between KRIs and Key Performance Indicators; understand the role each plays within

a risk management strategy.

• Apply KRIs to a company’s existing risk management strategy given a set of parameters.

• Describe the parameters for creating effective KRIs and how KRIs can be aligned to support an organization’s

risk management strategy.

• Explain how KRIs are used to monitor risk exposures on an ongoing basis and how KRIs help to calibrate risk

management strategies.

• Analyze the stakeholders, metrics and risk appetite inputs and explain how they are used to craft a set of

KRIs for an organization.

• Explain the challenges an organization may face in adopting KRIs for risk management.

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

Economics of Firm Organization and Safety.


• Define safety culture; identify and describe the external policies that can affect an organization’s safety culture.

• Summarize characteristics of high reliability organizations (HROs).

• Explain how the strength or weakness of an organization’s safety culture can impact its ability to manage

hazard risk.

• Understand the economic incentives of creating a strong safety culture and explain why firms may choose

not to develop a strong safety culture.

• Summarize the Oil Pollution Act of 1990 (OPA 90), define channeling and strict liability, and describe factors

which can affect or limit the responsible party's liability in the case of an oil spill.

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

NERA Economic Consulting. Lessons from the BP Deepwater Horizon Oil Spill.


• Identify four categories of risk that can impact an energy firm.

• Explain why strategic risk is often mishandled by corporations.

• Define the Bayesian approach to risk assessment and understand the circumstances in which it would likely

be applied.

• Explain how a lack of historical data can impact strategic risk assessments.

• Summarize how BP failed to adequately manage its strategic risk in relation to the Deepwater Horizon event.

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



Robert Bea, Ian Mitroff, Daniel Farber, Howard Foster and Karlene H. Roberts. A New Approach to Risk:

The Implications of E3.


• Describe the factors used to assess risk in a complex organization or system.

• Understand the interdisciplinary aspect of modeling risk associated with a complex system.

• Define a Type Three Error (E3); explain how mismanagement of this error can undermine a risk

management strategy.

• Summarize the elements used in a Complex Infrastructure System (CIS) risk assessment.

• Explain why human error may be overlooked in risk assessment and why engineering analyses often

underestimate the probability of a system failure.

Senior Supervisors Group. Observations on Developments in Risk Appetite Frameworks and IT Infrastructure.


• Describe the concept of a risk appetite framework (RAF), identify the elements of a RAF and explain the

benefits to a firm of having a well developed RAF.

• Describe best practices for a firm’s Chief Risk Officer (CRO), Chief Executive Officer (CEO) and Board of

Directors in the development and implementation of an effective risk appetite framework.

• Explain the role of a RAF in managing the risk of individual business lines within a firm.

• Identify metrics which can be monitored as part of an effective RAF and describe the classes of metrics to

be communicated to various managers within the firm.

• Explain the challenges and best practices related to data aggregation.

7.2 Strategic Risk Management and Corporate Governance

6. International Finance Corporation (IFC). Risk Taking: A Corporate Governance Perspective (June 2012).


AIMS:International Finance Corporation (IFC). Risk Taking: A Corporate Governance Perspective.


• Define risk, identify the classifications of risks, and explain the role played by risk in value creation.

• Describe the role of risk governance in a corporate organization.

• Summarize Enterprise Risk Management (ERM) approaches and explain how they address risk management

in an organization.

• Construct a risk-adjusted discount rate for an asset or project and apply that rate to estimate the value of

the asset or project; contrast the value using a certainty equivalent approach.

• Explain the challenges that can arise when using historical beta and equity risk premium assumptions in

a valuation model.

• Identify the four risk treatment strategies a firm can use to manage its risks.

• Define hedging, explain the tradeoff between the costs and benefits of hedging, and assess whether it is

appropriate for a firm to hedge in a particular case.

• Explain how an organization can create a culture of prudent risk-taking among its employees.

• Identify examples of acceptable, desirable, and best practices in corporate risk governance.



7.3 Ethics and the GARP Code of Conduct

7. Global Association of Risk Professionals (GARP).

Freely available on the GARP website.

AIMS:GARP Code of Conduct


• Describe the responsibility of each GARP member with respect to professional integrity, ethical conduct,

conflicts of interest, confidentiality of information and adherence to generally accepted practices in

risk management.

• Describe the potential consequences of violating the GARP Code of Conduct.



CURRENT ISSUES IN ENERGY

CURRENT ISSUES IN ENERGY—Exam Weight | 5%

NOTE ON THE CURRENT ISSUES IN ENERGY SECTION: Global energy risk managers must remain abreast of evolving regulation

and new developments in energy markets to effectively manage risk in their businesses. The “Current Issues” section is designed to

familiarize ERP candidates with current trends that are likely to have a long-term impact on the global energy markets. Information

contained within each current issues reading is relevant as of November 15, 2012 and candidates can expect to be tested on these

readings throughout 2013. Subsequent developments in these topics, or any new areas of focus, will be captured on the 2014

ERP Examination.

Readings for Current Issues in Energy—8 Questions

8.1 Impact of Russia’s Refinery Upgrade Plans on Global Fuel Oil Markets

1. Bassam Fattouh and James Henderson. The Impact of Russia’s Refinery Upgrade Plans on Global Fuel Oil

Markets (The Oxford Institute for Energy Studies).


AIMS:Bassam Fattouh and James Henderson. The Impact of Russia’s Refinery Upgrade Plans on Global Fuel

Oil Markets.


• Describe how demand for refined products within the Russian market has changed during the past

three decades.

• Understand why Russian refineries are not currently meeting domestic consumer demand.

• Assess capital investment trends in Russian refineries; explain how these investments have been affected by

tax policy and consumer demand.

• Identify the factors that currently impact the price spread between different grades of fuel oil in Europe.

Current Trends in the Refining Industry

2. Ernst & Young. The Oil Downstream: Vertically Challenged?


AIMS:Ernst & Young. The Oil Downstream: Vertically Challenged?


• Describe the valuation metrics used to assess the financial health of oil companies.

• Explain the economic and operational decisions made by IOCs in the past decade and how this interfaces

with current global supply and demand issues.

• Assess the role of private equity (PE) firms and master limited partnerships (MLP) in refinery operations.

• Explain the changing role of service stations in vertically integrated petroleum companies.



Europe’s Energy Security: Options and Challenges to Natural Gas Supply Diversification

3. Michael Ratner, Paul Belkin, and Jim Nochal. Europe’s Energy Security: Options and Challenges to Natural Gas

Supply Diversification (U.S. Congressional Research Service).


AIMS:Michael Ratner, Paul Belkin, and Jim Nochal. Europe’s Energy Security: Options and Challenges to Natural Gas

Supply Diversification.


• Assess the political and economic concerns associated with the European reliance on gas imports from Russia.

• Describe the Nord Stream and South Stream projects, their existing or intended route, and the rationale for

each of these projects.

• Identify potential sources of alternative natural gas supply imports to Europe, and explain the political,

economic, and/or logistical concerns associated with each.

• Assess the potential for LNG exports to become a sustainable source of European natural gas supply.

Economic Incentives and the Impact on Renewable Power Generation

4. Frank Huntowski, Aaron Patterson, and Michael Schnitzer. Negative Electricity Prices and the Production

Tax Credit. (The Northbridge Group).


AIMS:Frank Huntowski, Aaron Patterson, and Michael Schnitzer. Negative Electricity Prices and the Production

Tax Credit.


• Explain the intended purpose of the Production Tax Credit (PTC) in the wind industry.

• Describe how negative prices impact the operation of electricity markets.

• Explain the effect PTCs have on setting prices in an electricity market.

• Identify the factors that have created the recent increase in incidents of negative prices in the wind industry.

• Analyze the effect that PTC-based wind power production is having on fossil fuel-based electricity generation.



Market Manipulation

5. Shaun Ledgerwood, Gary Taylor, Romkaew Broehm and Dan Arthur. Losing Money to Increase Profits:

A Proposed Framework for Defining Market Manipulation (The Brattle Group, March 2011).


AIMS:Shaun Ledgerwood, Gary Taylor, Romkaew Broehm and Dan Arthur. Losing Money to Increase Profits:

A Proposed Framework for Defining Market Manipulation.


• Explain what is meant by the term “market manipulation.”

• Understand how a market participant can potentially manipulate an energy commodity market by booking

money losing transactions for potential economic gain.

• Summarize the negative impact that manipulators can potentially have on a market.

• Understand the burden of proof required to determine the existence of market manipulation in an energy

transaction under Dodd-Frank.

Dodd-Frank Regulatory Update

6. Sherman & Sterling LLP. A Corporate End-User’s Handbook for Dodd-Frank Title VII Compliance.


7. Baker Botts. CFTC Adopts Final “Swap” Definition, Interprets Statutory Exclusion for Physical Delivery Forwards.


AIMS:Sherman & Sterling LLP. A Corporate End-User’s Handbook for Dodd-Frank Title VII Compliance.


• Describe the term “hedge or mitigate Commercial Risk” and explain its affect on market participants under

Dodd-Frank.

• Explain the difference between an “end user” and a “financial entity.”

• Describe the role of a Swap Data Repository and understand end user reporting requirements.

• Explain why a party that qualifies for an end user exemption may still choose to clear certain swap transactions.

• Identify margin requirements for both cleared and non-cleared swaps; understand how these requirements

differ for end users and other market participants (Swap Dealers, Major Swap Participants, etc.).

• Describe the circumstances under which an end user could also qualify as a Major Swap Participant or

Major Security-based Swap Participant.

• Explain the actions foreign-based swap participants are required to take to comply with the current

Dodd-Frank regulations.

Baker Botts. CFTC Adopts Final “Swap” Definition, Interprets Statutory Exclusion for Physical

Delivery Forwards.


• Understand if a given energy contract would be considered a “swap” under CFTC rules.

• Understand why an option would be excluded from the swap definition under Dodd Frank.



NOTES

______________________________________________________________________________________________________________

______________________________________________________________________________________________________________

______________________________________________________________________________________________________________

______________________________________________________________________________________________________________

______________________________________________________________________________________________________________

______________________________________________________________________________________________________________

______________________________________________________________________________________________________________

______________________________________________________________________________________________________________

______________________________________________________________________________________________________________

______________________________________________________________________________________________________________

______________________________________________________________________________________________________________

______________________________________________________________________________________________________________

______________________________________________________________________________________________________________

______________________________________________________________________________________________________________

______________________________________________________________________________________________________________

______________________________________________________________________________________________________________

______________________________________________________________________________________________________________

______________________________________________________________________________________________________________

______________________________________________________________________________________________________________

______________________________________________________________________________________________________________

______________________________________________________________________________________________________________

2012 Energy Oversight Committee (EOC) Members

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Creating a culture of risk awareness.®

Global Association ofRisk Professionals

111 Town Square PlaceSuite 1215Jersey City, New Jersey 07310U.S.A.+ 1 201.719.7210

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

www.garp.org

© 2012 Global Association of Risk Professionals. All rights reserved. 11-29-12

About GARP | The Global Association of Risk Professionals (GARP) is a not-for-profit global membership organization dedicated topreparing professionals and organizations to make better informed risk decisions. Membership represents over 150,000 Members andAffiliates from banks, investment management firms, government agencies, academic institutions, and corporations from more than195 countries and territories. GARP administers the Financial Risk Manager (FRM®) and the Energy Risk Professional (ERP®) Exams;certifications recognized by risk professionals worldwide. GARP also helps advance the role of risk management via comprehensiveprofessional education and training for professionals of all levels. www.garp.org.

erp aim statements 2013-web

Documents