Erp Practice Exam3 2014 PDF

2014
ERP
Examination
Practice
Exam
PRACTICE EXAM 3
Energy Risk Professional Examination (ERP®) Practice Exam 3
TABLE OF CONTENTS
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
ERP Practice Exam 3 Candidate Answer Sheet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3
ERP Practice Exam 3 Questions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5
ERP Practice Exam 3 Answer Sheet/Answers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17
ERP Practice Exam 3 Explanations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .19
© 2014 Global Association of Risk Professionals. All rights reserved. It is illegal to reproduce this material i
in any format without prior written approval of GARP, Global Association of Risk Professionals, Inc.
Introduction Suggested Use of Practice Exams

The ERP Exam is a practice-oriented examination. Its ques- To maximize the effectiveness of the practice exams, candi-
tions are derived from a combination of theory, as set forth dates are encouraged to follow these recommendations:
in the core readings, and “real-world” work experience.
Candidates are expected to understand energy risk man- 1. Plan a date and time to take the practice exam.
agement concepts and approaches and how they would Set dates appropriately to give sufficient study/review
apply to an energy risk manager’s day-to-day activities. time for the practice exam prior to the actual exam.
The ERP Examination is also a comprehensive examination,
testing an energy risk professional on a number of risk man- 2. Simulate the test environment as closely as possible.
agement concepts and approaches. It is very rare that an ener- • Take the practice exam in a quiet place.
gy risk manager will be faced with an issue that can immedi- • Have only the practice exam, candidate answer
ately be slotted into just one category. In the real world, an sheet, calculator, and writing instruments (pencils,
energy risk manager must be able to identify any number of erasers) available.
risk-related issues and be able to deal with them effectively. • Minimize possible distractions from other people,
The ERP Practice Exam 3 has been developed to aid cell phones, televisions, etc.; put away any study
candidates in their preparation for the ERP Examination. material before beginning the practice exam.
This practice exam is based on a sample of actual questions • Allocate 3 minutes per question for the practice exam
from past ERP Examinations and is suggestive of the ques- and set an alarm to alert you when a total of 90 minutes
tions that will be in the 2014 ERP Examination. have passed. Complete the entire exam but note the
The ERP Practice Exam 3 contains 30 multiple choice questions answered after the 90-minute mark.
questions. Note that the 2014 ERP Examination will consist • Follow the ERP calculator policy. Candidates are only
of a morning and afternoon session, each containing 70 allowed to bring certain types of calculators into the
multiple choice questions. The practice exam is designed to exam room. The only calculators authorized for use
be shorter to allow candidates to calibrate their prepared- on the ERP Exam in 2014 are listed below, there will
ness for the exam without being overwhelming. be no exceptions to this policy. You will not be allowed
The ERP Practice Exam 3 does not necessarily cover into the exam room with a personal calculator other
all topics to be tested in the 2014 ERP Examination. For than the following: Texas Instruments BA II Plus
a complete list of topics and core readings, candidates (including the BA II Plus Professional), Hewlett Packard
should refer to the 2014 ERP Examination Study Guide. 12C (including the HP 12C Platinum and the Anniversary
Core readings were selected in consultation with the Energy Edition), Hewlett Packard 10B II, Hewlett Packard 10B II+
Oversight Committee (EOC) to assist candidates in their and Hewlett Packard 20B.
review of the subjects covered by the exam. Questions for
the ERP Examination are derived from these core readings 3. After completing the ERP Practice Exam 3
in their entirety. As such, it is strongly suggested that candi- • Calculate your score by comparing your answer
dates review all core readings listed in the 2014 ERP Study sheet with the practice exam answer key. Only
Guide in-depth prior to sitting for the exam. include questions completed within the first 90
minutes in your score.
A Note About Question Content: We have included several • Use the practice exam Answers and Explanations to
questions in this Practice Exam that are based on readings better understand the correct and incorrect answers
that are no longer a part of the 2014 ERP curriculum. These and to identify topics that require additional review.
have been included to offer content that has appeared on Consult referenced core readings to prepare for
prior ERP Exams and/or to provide fundamental concepts the exam.
and learning objectives about energy risk management that • Remember: pass/fail status for the actual exam is
are included in the 2014 ERP curriculum. based on the distribution of scores from all candi-
dates, so use your scores only to gauge your own
progress and level of preparedness.
© 2014 Global Association of Risk Professionals. All rights reserved. It is illegal to reproduce this material 1
Energy Risk
®
Professional(ERP )
Examination
Practice Exam 3
Answer Sheet
a. b. c. d. a. b. c. d.
1. 20.
2. 21.
3. 22.
4. 23.
5. 24.
6. 25.
7. 26.
8. 27.
9. 28.
10. 29.
11. 30.
12.
13.
14.
15.
16. Correct way to complete
17. 1.
18. Wrong way to complete
19. 1. ✓ ✘
Energy Risk
®
Professional(ERP )
Examination
Practice Exam 3
Questions
1. The table below summarizes the projected annual expenses and barrels of crude production related to the
development of a new oil reserve:
* Expenses in USD MMs Year 0 (now) Year 1 Year 2 Year 3

Exploration 20 0 0 0
Upstream Development 10 30 13 0
Operating and Transportation 10 30 20 15
Crude Oil Production (in BBLs) 0 1,000,000 400,000 200,000
Use the following assumptions to calculate the project’s NPV assuming that all cash flows occur at the end of
each year:
• Projected average price of crude oil produced: USD 95/bbl

• Risk-adjusted discount rate: 11%
a. USD -1,486,000
b. USD -1,338,000
c. USD 2,751,000
d. USD 4,160,000
2. An RTO is forced to bring additional power capacity online to meet peak demand. Rather than activate the
next plant in bid order at USD 40/MWh, the RTO chooses to activate a plant located twenty-five miles away
with a bid of USD 44/MWh. Why would the RTO make this decision?
a. Transmission constraints are preventing lower cost generators from supplying power to the area of high
demand.
b. Emission quotas are preventing lower cost generators from supplying power to the area of high demand.
c. Transmission costs are lower for the more distant plant during periods of high demand.
d. Baseload plants are preferred over peaker plants during periods of high demand.
3. What best describes a methodology for applying stress test results with VaR data to enhance the risk report-
ing process of an energy company?
a. Develop a histogram using tail risk losses from stress test results that can be used to identify outliers in
daily VaR data.
b. Identify plausible risk factors from stress results that can be integrated in VaR modeling to measure daily
maximum potential losses.
c. Derive a range of potential losses from stress test results that can be applied using VaR modeling to
measure daily tail risk and extreme loss events.
d. Use VaR to determine the probability of large loss events and stress tests to estimate the potential size of
extreme losses.
Questions 4 - 5 use the information below:
On September 1, 2013, a regional trucking company contracted to purchase 30,000 gallons of diesel fuel from
a local refinery for forward delivery in one-year at a fixed-price of USD 4.15/gallon. Terms of the purchase
require the trucking company to take delivery of the diesel fuel on September 1, 2014, after making payment
in full. The continuously compounded risk-free interest rate is 5% per year.
4. Suppose that by the end of May 2014, the price for diesel has risen to USD 4.40/gallon. What is the refinery’s
replacement risk on May 31, 2014 (3 months from the delivery date)?
a. USD 7,224
b. USD 7,407
c. USD 7,594
d. USD 7,787
5. How will settlement risk on the transaction change if the closing price of diesel fuel is USD 4.50/gallon on
June 30?
a. Settlement risk increases.

b. Settlement risk decreases.
c. Settlement risk remains the same.
d. Settlement risk cannot be determined from the information provided.
6. A petroleum exploration and production (E&P) company is considering the adoption of a series of Key Risk
Indicators (KRIs) into their risk management strategy. What would be a potential flaw in the company’s use of
KRIs as a risk management tool?
a. The firm may lack the necessary expertise for monitoring and managing KRIs.
b. The additional overhead associated with the implementation of KRIs may reduce the E&P’s profitability
substantially.
c. The reliance on KRIs may make the organization less proactive in assessing and addressing risks.
d. The adoption of KRIs as a new metric could lead to confusion about the organization’s overall risk strategy.
6 © 2014 Global Association of Risk Professionals. All rights reserved. It is illegal to reproduce this material
7. Use the information in the table below to rank the quality of coal samples from four different reserves from
highest to lowest quality.
Coal Reserves Sulfur Ash Moisture Volatile Matter Fixed Carbon

Content Content Content Content Content
Seneca 0.8 10.1 11.4 34.2 44.3
Black Thunder 0.5 5.0 27.0 32.0 34.5
Bowie 1.0 9.0 9.0 36.5 60.0
Cordero 0.2 5.7 30.3 32.0 20.0
a. Black Thunder, Cordero, Bowie, Seneca

b. Seneca, Bowie, Cordero, Black Thunder
c. Cordero, Black Thunder, Seneca, Bowie
d. Bowie, Seneca, Black Thunder, Cordero
8. An LNG export terminal in Brunei is negotiating a long-term supply contract with a Korean utility company.
What contractual arrangement will best protect the LNG producer against economic loss if the Korean utility
refuses delivery of the contracted volume of LNG?
a. A credit support annex

b. A take-or-pay provision
c. A force majeure clause
d. A quick sale provision with liquidated damages
9. To hedge against rising jet fuel prices, a commercial airline purchases a costless collar to manage price risk on
50,000 barrels of jet fuel for each of the next six months. Terms of the collar include the following:
• Cap: USD 125/bbl

• Floor: USD 115/bbl
• Tenor: Six months (June to November)
• Valuation Index: Mean of Platts Singapore (MOPS)
The monthly MOPS Index per barrel prices are as follows:
• June – USD 132 • September – USD 128

• July – USD 120 • October – USD 122
• August – USD 111 • November - USD 115
What is the net settlement payment owed to/from the airline at the end of November?
a. The airline receives USD 300,000

b. The airline pays USD 300,000
c. The airline receives USD 500,000
d. The airline pays USD 500,000
10. Which of the following properties indicates the existence of “fat tails” in a lognormal distribution?
a. Homoskedasticity
b. Heteroskedasticity
c. Volatility Smile
d. Leptokurtosis
11. What natural gas storage option provides the greatest flexibility and ease of use during extraction?
a. Above ground tank storage

b. Aquifer storage
c. Depleted reservoir storage
d. Salt cavern storage
12. Use the assumptions below to calculate the target allocation settlement for a one hour FTR traded on PJM.
• Point of delivery price – USD 76/MWh

• Point of receipt price – USD 65/MWh
• Hourly system clearing price – USD 64/MWh
• FTR volume – 200 MWh
a. USD 200
b. USD 1,100
c. USD 2,200
d. USD 2,400
13. A Texas refinery is negotiating a 2-year OTC crude oil swap with a local crude oil producer in early December
2013, to be cleared through ICE with the following basic terms:
• Fixed payer (buyer): Refiner

• Floating payer (seller): Producer
• Volume: 200,000 barrels
• Fixed Price: TBD
• Floating Price: Closing ICE Brent Futures Price on February 15, 2014 and 2015
At the time of trade execution, the 1-year and 2-year Brent futures prices are USD 102.65 and USD 104.28, and
the annual zero-coupon bond yields are 1.5% and 2.0% respectively. Consider the following expression:
x y z z
+ = + =w
1.02 1.02752 1.02 1.02752
Which variable corresponds to the 2-year swap price?
a. w
b. x
c. y
d. z
14. Ocean Wind Authority (OWA) is the project sponsor for High Cliffs Wind (HCW), a new 1,000 MW offshore
wind turbine installation. HCW has a BBB credit rating based on the results of an initial feasibility study. OWA
has secured a Power Purchase Agreement (PPA) from Acme Power and Light (APL), a AA rated local electric
utility. Under terms of the PPA, APL has made a firm ten year commitment to purchase up to 90% of the
power generated by the facility after its expected completion in five years. Assuming OWA arranges bank
loans to fund the project, what will most likely be the terms of the lending arrangement?
a. A fifteen year amortizing term loan with recourse to the assets of HCW, priced as a BBB credit.
b. A five year construction loan that converts to a ten year fully amortizing term loan, priced as a AA credit
with recourse to the assets of HCW.
c. A fifteen year amortizing, non-recourse term loan, priced as a AA credit.
d. A five year construction loan that converts to a ten year fully amortizing, non-recourse term loan, priced
as a AA credit.
15. Credit risk exposure is best defined by which of the following?
a. The sum of settlement risk and replacement risk

b. The sum of settlement risk and basis risk
c. The sum of settlement risk and legal risk
d. The sum of settlement risk and liquidity risk
16. Use the data below to calculate the implied market heat rate for a power grid supplied by a series of natural
gas-fired generators.
• Grid load: 240,000 MWh

• Market clearing price: USD 65.85/MWh
• Natural gas price (daily average): USD 4.60/MMBtu
a. 8.87
b. 12.91
c. 14.32
d. 16.15
17. An oil field has been described as having a P90 of 500 Mbbls. What does this mean?
a. There is a 90% chance the true reserves of the field will exceed 500 Mbbls
b. There is a 90% chance the true reserves of the field will be less than 500 Mbbls
c. There is a 90% chance the true resources of the field will exceed 500 Mbbls
d. There is a 90% chance the true resources of the field will be less than 500 Mbbls
18. The middle office trade support group at Tyler Trading is evaluating the margin requirements related to the
purchase of 400 WTI April futures contracts with the following terms:
• Trade date: January 25

• Purchase price: USD 107.81/bbl
• Initial margin requirement: USD 3,900,000
• Required maintenance threshold: USD 3,120,000
In the case of a margin call, the exchange requires that the investor “top-up” the account balance to the initial
required margin level. Below what price will a margin call be triggered on the April WTI futures position?
a. 102.68/bbl
b. 104.99/bbl
c. 105.86/bbl
d. 107.61/bbl
19. New regulations require the Ontario Independent Electricity System Operator (IESO) to source 10% of its grid
power from renewable sources. What renewable source will best mitigate supply risk for the IESO?
a. Active solar
b. Hydroelectric
c. Passive solar
d. Wind
20. Caufield Refining enters into a transaction using NYMEX WTI futures contracts to hedge against an anticipat-
ed purchase of 40,000 barrels of WTI crude oil in two months’ time. The contracts trade at USD 97.00/bbl at
the time Caufield enters the transaction. Two months later, Caufield closes out its futures position and pur-
chases the 40,000 barrels at spot. What is the effective price paid per barrel if the futures contract is now
trading at USD 98.50/bbl and the spot price is USD 100.10/bbl?
a. USD 98.50
b. USD 98.60
c. USD 100.10
d. USD 100.40
Correct answer: b
Explanation: The effective price paid (in dollars per barrel) is the final spot price less the gain on the futures, or
100.10 – 1.50 = 98.60. This can also be calculated as the initial futures price plus the final basis, 97.00 + 1.60 = 98.60.
Reading reference: Robert McDonald, Derivatives Markets, 3rd Edition, Chapter 6.
WestTex Land Holdings owns 6,000 acres of land in the western United States. Gato Grande Ltd., a petroleum
exploration and production company, is interested in prospecting for oil on the land owned by WestTex. Gato
Grande Ltd. signs a royalty interest (RI) lease agreement giving WestTex a 1/4 share of the gross production
revenues. After a test well reveals the existence of a large oil reservoir, Gato Grande sells a 100% working
interest on 3,600 acres to Monarch Petroleum to help offset the estimated USD 2.5 million in capital costs to
develop this large field. Once in production, the field produces 500 barrels of oil per day.
21. Under the arrangement described above, who owns the mineral rights to the oil in place?
a. Gato Grande
b. Monarch Petroleum
c. Gato Grande and Monarch Petroleum
d. WestTex Land Holdings
22. The working interest on the 3,600 acres which Gato Grande sold to Monarch Petroleum is an example of what
kind of working interest?
a. Shared
b. Divided
c. Pro-rated
d. Undivided
23. During the first year of production oil produced from the field sells for an average of USD 113/bbl. Assuming
production is uniformly distributed across the acreage, what will be Gato Grande’s net revenue for the year
(assume a 365 day year)?
a. USD 6,186,750
b. USD 8,249,000
c. USD 12,373,500
d. USD 16,498,000
24. Reserve power generators are typically selected by an ISO through an auction process. What economic com-
pensation do operating reserve generators receive?
a. A fee for time spent as an operating reserve, plus payment for any electricity dispatched.
b. A fee for time spent as an operating reserve with no additional compensation for any power dispatched.
c. The market clearing price during time spent as an operating reserve, plus an option to sell excess power
on the spot market.
d. The market clearing price during time spent as an operating reserve with no additional compensation for
any power dispatched,
25. What is the practical implication of a USD 2,000,000, 10-day, 95% VaR on a USD 10,000,000 energy commodity
portfolio?
a. Portfolio losses over a ten day period should exceed USD 2 million once in every five, ten day periods.
b. Portfolio losses over a ten day period should exceed USD 2 million once in every twenty, ten-day periods.
c. There is a 5% chance that portfolio losses should exceed USD 2 million during each of the next ten trading days.
d. There is a 95% chance that portfolio losses should exceed USD 2 million during each of the next ten trading days.
26. Counterparty risk creates a risk profile most similar to what position?
a. Long futures
b. Short futures
c. Long option
d. Short option
27. Under what circumstances should a company dedicate its resources to risk mitigation rather than risk preven-
tion activities?
a. When the probability of a risk event is high but its potential impact is small.
b. When the probability of a risk event is low but its potential impact is large.
c. When the probability of a risk event is low and its potential impact is small.
d. The primary focus should always be on risk prevention activities.
28. Under a concessionary system, what compensation is a production company entitled to receive from a host
country if exploration efforts fail to find commercially viable oil or gas fields?
a. Reimbursement of total exploration costs incurred.

b. A pro-rata reimbursement of exploration costs incurred based on total original cost estimates.
c. Reimbursement of drilling costs only.
d. No reimbursement.
29. A British crude oil marketer has a one year obligation to deliver 350,000 barrels of Brent Blend crude oil at a
fixed price FOB to a refiner in Belgium on a monthly basis. The marketer believes that the current forward
curve (see below) is too steep and expects it to flatten significantly. Which of the following trades will the
marketer most likely execute given its current market view?
139
Crude Price (USD)
134
129
124
119
114
0 3 6 9 12 15 18
a. Exchange for Physical

b. Stack hedge
c. Strip hedge
d. Swing swap
30. Consider the following observed price data for two different commodities over a four-day period. What is the
best estimate of price correlation between the two commodities?
Commodity A Commodity B
Day 1 3.65 108.2
Day 2 3.43 114.35
Day 3 3.53 110.36
Day 4 3.32 113.5
Sample mean 3.4825 111.6025
a. -0.9
b. -0.25
c. 0.25
d. 0.9
Energy Risk
®
Professional(ERP )
Examination
Practice Exam 3
Answers
a. b. c. d. a. b. c. d.
1. 20.
2. 21.
3. 22.
4. 23.
5. 24.
6. 25.
7. 26.
8. 27.
9. 28.
10. 29.
11. 30.
12.
13.
14.
15.
16. Correct way to complete
17. 1.
18. Wrong way to complete
19. 1. ✓ ✘
Energy Risk
®
Professional(ERP )
Examination
Practice Exam 3
Explanations
1. The table below summarizes the projected annual expenses and barrels of crude production related to the
development of a new oil reserve:
* Expenses in USD MMs Year 0 (now) Year 1 Year 2 Year 3

Exploration 20 0 0 0
Upstream Development 10 30 13 0
Operating and Transportation 10 30 20 15
Crude Oil Production (in BBLs) 0 1,000,000 400,000 200,000
Use the following assumptions to calculate the project’s NPV assuming that all cash flows occur at the end of
each year:
• Projected average price of crude oil produced: USD 95/bbl

• Risk-adjusted discount rate: 11%
a. USD -1,486,000
b. USD -1,338,000
c. USD 2,751,000
d. USD 4,160,000
Correct answer: a
Explanation: The correct answer is a.

We must first figure out the total cash inflow or outflow expected for the four year period, as follows:
Year 0 Year 1 Year 2 Year 3

Total Income (USD/millions) 0 95 38 19
Total costs (USD/millions) 40 60 33 15
Cash flow -40 +35 +5 +4
The discount factors for the four years would be: Year 0: 1, Year 1: 1/(1+0.11) or 0.901, Year 2: 1/(1+0.11)2 or 0.812,
and Year 3: 1/(1+0.11)3, or 0.731. Then multiply each cash flow by the discount factor and sum the results to get
the NPV: NPV = -40 + (35*0.901) + (5*0.812) + (4*0.731) = -1.486 million.
Reading reference: Andrew Inkpen and Michael H. Moffett. The Global Oil and Gas Industry: Management,
Strategy and Finance, Chapter 4, page 142-143.
2. An RTO is forced to bring additional power capacity online to meet peak demand. Rather than activate the
next plant in bid order at USD 40/MWh, the RTO chooses to activate a plant located twenty-five miles away
with a bid of USD 44/MWh. Why would the RTO make this decision?
a. Transmission constraints are preventing lower cost generators from supplying power to the area of high
demand.
b. Emission quotas are preventing lower cost generators from supplying power to the area of high demand.
c. Transmission costs are lower for the more distant plant during periods of high demand.
d. Baseload plants are preferred over peaker plants during periods of high demand.
Correct answer: a
Explanation:A plant would be operated out-of-merit order if constraints on transmission lines prevented a lower
cost plant from supplying power to an area of high demand, making A the correct answer. Emissions costs would
be factored into the bid, and activation decisions are based on cost, not whether a plant is baseload or peaker,
though peaker plants generally have higher operating costs and submit higher bids than baseload plants.
Reading reference: Steven Stoft, Power System Economics: Designing Markets for Electricity, Chapter 5.3,
Congestion Pricing Fundamentals; Chapter 5.4, Congestion Pricing Method.
3. What best describes a methodology for applying stress test results with VaR data to enhance the risk report-
ing process of an energy company?
a. Develop a histogram using tail risk losses from stress test results that can be used to identify outliers in
daily VaR data.
b. Identify plausible risk factors from stress results that can be integrated in VaR modeling to measure daily
maximum potential losses.
c. Derive a range of potential losses from stress test results that can be applied using VaR modeling to
measure daily tail risk and extreme loss events.
d. Use VaR to determine the probability of large loss events and stress tests to estimate the potential size of
extreme losses.
Correct answer: d
Explanation: The correct answer is d. According to Dowd, probabilistic methods such as VaR are good at
determining the likelihood of large losses while stress test scenarios can measure the potential size of any
large losses which might be incurred.
Reading reference: Kevin Dowd, Measuring Market Risk, Chapter 13, page 292.
On September 1, 2013, a regional trucking company contracted to purchase 30,000 gallons of diesel fuel from
a local refinery for forward delivery in one-year at a fixed-price of USD 4.15/gallon. Terms of the purchase
require the trucking company to take delivery of the diesel fuel on September 1, 2014, after making payment
in full. The continuously compounded risk-free interest rate is 5% per year.
4. Suppose that by the end of May 2014, the price for diesel has risen to USD 4.40/gallon. What is the refinery’s
replacement risk on May 31, 2014 (3 months from the delivery date)?
a. USD 7,224
b. USD 7,407
c. USD 7,594
d. USD 7,787
Correct answer: b
Explanation: The correct answer is b. The replacement risk can be calculated by using the following equation:
R = Volume x Price Difference x discount factor (in this case the discount factor is calculated at t =3/12 and r =0.05)
R = 30,000 * (4.40-4.15) * exp(-0.05 x 3/12) = 7,407.
Reading reference: Markus Burger, Bernhard Graeber, and Gero Schindlmayr. Managing Energy Risk: An
Integrated View on Power and Other Energy Markets. Chapter 6.3.
5. How will settlement risk on the transaction change if the closing price of diesel fuel is USD 4.50/gallon on
June 30?
a. Settlement risk increases.

b. Settlement risk decreases.
c. Settlement risk remains the same.
d. Settlement risk cannot be determined from the information provided.
Correct answer: c
Explanation:The settlement risk is constant based on the original terms of the fixed price purchase contract.
Replacement risk will change with the spot price of the underlying commodity, but not the settlement risk.
6. A petroleum exploration and production (E&P) company is considering the adoption of a series of Key Risk
Indicators (KRIs) into their risk management strategy. What would be a potential flaw in the company’s use of
KRIs as a risk management tool?
a. The firm may lack the necessary expertise for monitoring and managing KRIs.
b. The additional overhead associated with the implementation of KRIs may reduce the E&P’s profitability
substantially.
c. The reliance on KRIs may make the organization less proactive in assessing and addressing risks.
d. The adoption of KRIs as a new metric could lead to confusion about the organization’s overall risk strategy.
Correct answer: a
Explanation: The correct answer is a. A potential problem with the adoption of KRIs is that a company may
lack the expertise to properly implement and manage them. The other answers are incorrect: KRIs can poten-
tially improve profitability by reducing losses; KRIs tend to make organizations more proactive in their han-
dling of risks; and KRIs are designed to complement, not replace, an organization’s existing risk strategies.
Reading reference: John Fraser and Betty Simkins, Enterprise Risk Management: Today’s Leading Research
and Best Practices for Tomorrow’s Executives, Chapter 8, pages 135-139.
7. Use the information in the table below to rank the quality of coal samples from four different reserves from
highest to lowest quality.
Coal Reserves Sulfur Ash Moisture Volatile Matter Fixed Carbon

Content Content Content Content Content
Seneca 0.8 10.1 11.4 34.2 44.3
Black Thunder 0.5 5.0 27.0 32.0 34.5
Bowie 1.0 9.0 9.0 36.5 60.0
Cordero 0.2 5.7 30.3 32.0 20.0
a. Black Thunder, Cordero, Bowie, Seneca

b. Seneca, Bowie, Cordero, Black Thunder
c. Cordero, Black Thunder, Seneca, Bowie
d. Bowie, Seneca, Black Thunder, Cordero
Correct answer: d
Explanation: Answer “d” lists the coal types in the correct order. The higher the fixed carbon content, the
higher the calorific/heating value of the coal type. Moisture reduces the calorific value of coal, and in this
example, moisture content is arranged in inverse proportion to the carbon content.
Reading reference: Vincent Kaminski, Energy Markets, Chapter 26, pages 942-944.
8. An LNG export terminal in Brunei is negotiating a long-term supply contract with a Korean utility company.
What contractual arrangement will best protect the LNG producer against economic loss if the Korean utility
refuses delivery of the contracted volume of LNG?
a. A credit support annex

b. A take-or-pay provision
c. A force majeure clause
d. A quick sale provision with liquidated damages
Correct answer: b
Explanation: The correct answer is b. A take-or-pay provision forces the customer to either take the volume
of gas specified by the contract – whether it is needed or not – or pay for the gas, even if it is never delivered.
Answer d is incorrect because while a spot market is developing for LNG, it cannot be considered fully liquid
in that the exporter cannot be guaranteed that there would be a buyer available for this cargo.
Reading reference: Andrew Inkpen and Michael Moffett. The Global Oil and Gas Industry: Management,
Strategy and Finance, Chapter 9, page 336.
9. To hedge against rising jet fuel prices, a commercial airline purchases a costless collar to manage price risk on
50,000 barrels of jet fuel for each of the next six months. Terms of the collar include the following:
• Cap: USD 125/bbl

• Floor: USD 115/bbl
• Tenor: Six months (June to November)
• Valuation Index: Mean of Platts Singapore (MOPS)
The monthly MOPS Index per barrel prices are as follows:
• June – USD 132 • September – USD 128

• July – USD 120 • October – USD 122
• August – USD 111 • November - USD 115
What is the net settlement payment owed to/from the airline at the end of November?
a. The airline receives USD 300,000

b. The airline pays USD 300,000
c. The airline receives USD 500,000
d. The airline pays USD 500,000
Correct answer: a
Explanation: Settlement payments will be made for June, August and September, the months that the index
price is set beyond the cap/floor price threshold. For June the airline will receive USD 350,000 (132 – 125 x
50,000); in September, they will receive USD 150,000 (128 – 125 x 50,000); in August the airline will pay USD
200,000 (115 – 111 x 50,000) resulting in a total settlement after six months of USD 300,000.
Reading reference: Vincent Kaminski, Energy Markets, Chapter 18, Transactions in the Oil Markets.
10. Which of the following properties indicates the existence of “fat tails” in a lognormal distribution?
a. Homoskedasticity
b. Heteroskedasticity
c. Volatility Smile
d. Leptokurtosis
Correct answer: d
Explanation: Answer d is correct: Leptokurtosis refers to the property of a distribution displaying fat tails. This
signifies that the probability of an extreme event (i.e. gain or loss) is higher than would be expected under a
normal distribution.
Reading reference: Les Clewlow and Chris Strickland, Energy Derivatives: Pricing and Risk Management, Chapter 3.
11. What natural gas storage option provides the greatest flexibility and ease of use during extraction?
a. Above ground tank storage

b. Aquifer storage
c. Depleted reservoir storage
d. Salt cavern storage
Correct answer: d
Explanation: The correct answer is d. Since salt caverns allow for the quickest withdrawal of stored gas
among all of the underground storage options, withdrawal can begin much more quickly than with aquifers or
depleted reservoirs. Above ground tanks are typically not used for the storage of natural gas.
Reading reference: Vivek Chandra. Fundamentals of Natural Gas: An International Perspective, Chapter 2,
pages 72-73.
12. Use the assumptions below to calculate the target allocation settlement for a one hour FTR traded on PJM.
• Point of delivery price – USD 76/MWh

• Point of receipt price – USD 65/MWh
• Hourly system clearing price – USD 64/MWh
• FTR volume – 200 MWh
a. USD 200
b. USD 1,100
c. USD 2,200
d. USD 2,400
Correct answer: c
Explanation: The correct answer is c. To calculate the target allocation settlement, the price for power at the
point of receipt is subtracted from the price for power at the point of delivery, in this case USD 76 – USD 65 =
USD 11. This price is multiplied by the volume of the FTR: 200 * USD 11 = USD 2,200.
Note: for this calculation, the hourly clearing price is not used.
Reading reference: Vincent Kaminski, Energy Markets, Chapter 23.
13. A Texas refinery is negotiating a 2-year OTC crude oil swap with a local crude oil producer in early December
2013, to be cleared through ICE with the following basic terms:
• Fixed payer (buyer): Refiner

• Floating payer (seller): Producer
• Volume: 200,000 barrels
• Fixed Price: TBD
• Floating Price: Closing ICE Brent Futures Price on February 15, 2014 and 2015
At the time of trade execution, the 1-year and 2-year Brent futures prices are USD 102.65 and USD 104.28, and
the annual zero-coupon bond yields are 1.5% and 2.0% respectively. Consider the following expression:
x y z z
+ = + =w
1.02 1.02752 1.02 1.02752
Which variable corresponds to the 2-year swap price?
a. w
b. x
c. y
d. z
Correct answer: d
Explanation: The correct answer is d. The swap price is the annual fixed payment required to solve for the value
of a 2-year prepaid swap using the assumed forward Brent prices and 1 and 2-year zero-coupon bond rates.
In this case substituting 102.65 for x and 104.28 for y, the total value of the swap, w, is equal to = (102.65/1.015) +
(104.28)/(1.022) = 201.36. Using this value, we can then solve for the swap price z which solves the following
equation: (z / 1.015) + ( z /1.022) = 201.36.
Reading reference: IEA, “The Mechanics of the Derivatives Markets: What They Are and How They Function.”
(Special Supplement to the Oil Market Report, April 2011).
14. Ocean Wind Authority (OWA) is the project sponsor for High Cliffs Wind (HCW), a new 1,000 MW offshore
wind turbine installation. HCW has a BBB credit rating based on the results of an initial feasibility study. OWA
has secured a Power Purchase Agreement (PPA) from Acme Power and Light (APL), a AA rated local electric
utility. Under terms of the PPA, APL has made a firm ten year commitment to purchase up to 90% of the
power generated by the facility after its expected completion in five years. Assuming OWA arranges bank
loans to fund the project, what will most likely be the terms of the lending arrangement?
a. A fifteen year amortizing term loan with recourse to the assets of HCW, priced as a BBB credit.
b. A five year construction loan that converts to a ten year fully amortizing term loan, priced as a AA credit
with recourse to the assets of HCW.
c. A fifteen year amortizing, non-recourse term loan, priced as a AA credit.
d. A five year construction loan that converts to a ten year fully amortizing, non-recourse term loan, priced
as a AA credit.
Correct answer: d
Explanation: Project finance lending structures typically include an initial construction loan that converts to a
term loan. With a separate project company, the execution of a PPA with Acme Power and Light would be
typical of a project finance agreement; a benefit to OWA is that they may then be able to use the utility’s
higher credit rating to reduce their own borrowing costs. The basic premise of a project finance agreement is
that the loan is based on the future cash flows of the project (in this case the PPA) and that lenders have little
or no recourse in the case of a default.
Reading reference: Chris Groobey, John Pierce, Michael Faber and Greg Broome. Project Finance Primer for
Renewable Energy and Clean Tech Projects.
15. Credit risk exposure is best defined by which of the following?
a. The sum of settlement risk and replacement risk

b. The sum of settlement risk and basis risk
c. The sum of settlement risk and legal risk
d. The sum of settlement risk and liquidity risk
Correct answer: a
Explanation: When entering a fixed price contract, the settlement risk is predictable even for the future. The
cashflow dates and amount are fixed. However, the replacement risk depends on the development of market
prices. Strict credit risk limitation can only hold if there is a margin agreement with the counterparty. The
credit risk exposure is the sum of the settlement and the replacement risk.
16. Use the data below to calculate the implied market heat rate for a power grid supplied by a series of natural
gas-fired generators.
• Grid load: 240,000 MWh

• Market clearing price: USD 65.85/MWh
• Natural gas price (daily average): USD 4.60/MMBtu
a. 8.87
b. 12.91
c. 14.32
d. 16.15
Correct answer: c
Explanation: The correct answer is c. The implied market heat rate is calculated by dividing the cost of the
natural gas into the market clearing price for electricity: USD 65.85 / USD 4.60 = 14.32.
Reading reference: Vincent Kaminski, Energy Markets, Chapter 22.
17. An oil field has been described as having a P90 of 500 Mbbls. What does this mean?
a. There is a 90% chance the true reserves of the field will exceed 500 Mbbls
b. There is a 90% chance the true reserves of the field will be less than 500 Mbbls
c. There is a 90% chance the true resources of the field will exceed 500 Mbbls
d. There is a 90% chance the true resources of the field will be less than 500 Mbbls
Correct answer: a
Explanation: In general “Px” is the value where there is an x% probability that the true reserves of a given
field exceed Px. Therefore, if the P90 of an oilfield is 500 Mbbls, then there is a 90% probability that the true
reserves exceed 500 Mbbls, making “a” the correct answer. Since Px values relate to reserves and not to
resources, c and d are incorrect by definition.
Reading reference: Joseph Hilyard, The Oil and Gas Industry: A Non-Technical Guide, Chapter 2.
18. The middle office trade support group at Tyler Trading is evaluating the margin requirements related to the
purchase of 400 WTI April futures contracts with the following terms:
• Trade date: January 25

• Purchase price: USD 107.81/bbl
• Initial margin requirement: USD 3,900,000
• Required maintenance threshold: USD 3,120,000
In the case of a margin call, the exchange requires that the investor “top-up” the account balance to the initial
required margin level. Below what price will a margin call be triggered on the April WTI futures position?
a. 102.68/bbl
b. 104.99/bbl
c. 105.86/bbl
d. 107.61/bbl
Correct answer: c
Explanation: The correct answer is c. The trader can lose no more than (3,900,000-3,120,000), or 780,000,
on this trade without receiving a call. In order to find the correct price, we must first find the gain or loss on
the trade per dollar change in the WTI futures contracts, which is 400 contracts * 1,000 barrels per contract,
or USD 400,000. Therefore, the contract can trade no lower than 107.81-(780,000/400,000), or 105.86, before
the trader gets a call.
Reading reference: IEA, “The Mechanics of the Derivatives Markets: What They Are and How They Function”
(Special Supplement to the Oil Market Report, April 2011).
19. New regulations require the Ontario Independent Electricity System Operator (IESO) to source 10% of its grid
power from renewable sources. What renewable source will best mitigate supply risk for the IESO?
a. Active solar
b. Hydroelectric
c. Passive solar
d. Wind
Correct answer: b
Explanation: The correct answer is b; hydroelectric plants have a much higher rate of availability than wind or
solar installations (for example, a run-of-river hydro plant can have an availability of 65%).
Reading reference: Intergovernmental Panel on Climate Change (IPCC). IPCC Special Report on Renewable
Energy Sources and Climate Change Mitigation. Chapter 5: Hydropower.
20. Caufield Refining enters into a transaction using NYMEX WTI futures contracts to hedge against an anticipat-
ed purchase of 40,000 barrels of WTI crude oil in two months’ time. The contracts trade at USD 97.00/bbl at
the time Caufield enters the transaction. Two months later, Caufield closes out its futures position and pur-
chases the 40,000 barrels at spot. What is the effective price paid per barrel if the futures contract is now
trading at USD 98.50/bbl and the spot price is USD 100.10/bbl?
a. USD 98.50
b. USD 98.60
c. USD 100.10
d. USD 100.40
Correct answer: b
Explanation: The effective price paid (in dollars per barrel) is the final spot price less the gain on the futures, or
100.10 – 1.50 = 98.60. This can also be calculated as the initial futures price plus the final basis, 97.00 + 1.60 = 98.60.
Reading reference: Robert McDonald, Derivatives Markets, 3rd Edition, Chapter 6.
WestTex Land Holdings owns 6,000 acres of land in the western United States. Gato Grande Ltd., a petroleum
exploration and production company, is interested in prospecting for oil on the land owned by WestTex. Gato
Grande Ltd. signs a royalty interest (RI) lease agreement giving WestTex a 1/4 share of the gross production
revenues. After a test well reveals the existence of a large oil reservoir, Gato Grande sells a 100% working
interest on 3,600 acres to Monarch Petroleum to help offset the estimated USD 2.5 million in capital costs to
develop this large field. Once in production, the field produces 500 barrels of oil per day.
21. Under the arrangement described above, who owns the mineral rights to the oil in place?
a. Gato Grande
b. Monarch Petroleum
c. Gato Grande and Monarch Petroleum
d. WestTex Land Holdings
Correct answer: d
Explanation: Under United States law, the mineral rights to the land would reside with the landowner (unless
they were sold off separately); this is different from the policy in many countries where mineral rights lay with
the state. WestTex has leased the rights to their land to Gato Grande, but WestTex maintains ownership of the
mineral rights and thus the oil. In many other countries, any subsurface minerals would belong to the state;
this is not the case under United States law. Once the oil is produced, WestTex is entitled to a royalty, but no
longer owns it (except for any royalty oil taken in kind). In other words, there is a transfer of title at the well-
head — it is important to make this distinction.
Reading reference: Charlotte Wright & Rebecca Gallun, Fundamentals of Oil & Gas Accounting, Chapter 1.
22. The working interest on the 3,600 acres which Gato Grande sold to Monarch Petroleum is an example of what
kind of working interest?
a. Shared
b. Divided
c. Pro-rated
d. Undivided
Correct answer: b
Explanation: Since Gato Grande is selling Monarch Petroleum a working interest on only a portion of the total
acreage, this is an example of a divided working interest. If Gato Grande sold Monarch a partial working inter-
est to the entire 6,000 acres of the land, this would be an undivided working interest. In this context, shared
and pro-rated are made-up terms.
Reading reference: Wright & Gallun, Fundamentals of Oil & Gas Accounting, Chapter 1.
23. During the first year of production oil produced from the field sells for an average of USD 113/bbl. Assuming
production is uniformly distributed across the acreage, what will be Gato Grande’s net revenue for the year
(assume a 365 day year)?
a. USD 6,186,750
b. USD 8,249,000
c. USD 12,373,500
d. USD 16,498,000
Correct answer: a
Explanation: Under the terms of the agreement with Monarch Petroleum, Gato Grande is entitled to all of the
oil revenue from 2400 acres, or 40%, of the reserve, minus the one-quarter royalty payment to be made to
WestTex. Production of 500/bbl per day, selling at a price of USD 113 during the course of a year is USD 113 *
500 *365 = 20,622,500. Gato Grande is entitled to 40% of this amount or USD 35,040,000 * .4 = USD
8,249,000. Gato Grande must pay WestTex a one-quarter royalty or (USD 8,249,000 / 4) = USD 2,062,250).
This results in a gross revenue to Gato Grande of USD 6,186,750.
Reading reference: Wright & Gallun, Fundamentals of Oil & Gas Accounting, Chapter 1.
24. Reserve power generators are typically selected by an ISO through an auction process. What economic com-
pensation do operating reserve generators receive?
a. A fee for time spent as an operating reserve, plus payment for any electricity dispatched.
b. A fee for time spent as an operating reserve with no additional compensation for any power dispatched.
c. The market clearing price during time spent as an operating reserve, plus an option to sell excess power
on the spot market.
d. The market clearing price during time spent as an operating reserve with no additional compensation for
any power dispatched,
Correct answer: a
Explanation: The correct answer is a; as an operating reserve the generator agrees to have its dispatch con-
trolled by the ISO. The generator will receive payment for serving in OR and will be paid for any electricity
they dispatch to the SO. If the generator does not dispatch any electricity, it will be paid a make-whole “side
payment” as long as it agrees to follow the dispatch rules set by the generator. The other answers are incor-
rect: since it is in operating reserve, the generator cannot sell power on the spot market, which is why serving
as an OR is said to entail an opportunity cost to the generator, since they do not have this opportunity to sell
power on the open market.
Reading reference: Steven Stoft, Power System Economics: Designing Markets for Electricity, Chapter 3.6, page 260.
25. What is the practical implication of a USD 2,000,000, 10-day, 95% VaR on a USD 10,000,000 energy com-
modity portfolio?
a. Portfolio losses over a ten day period should exceed USD 2 million once in every five, ten day periods.
b. Portfolio losses over a ten day period should exceed USD 2 million once in every twenty, ten-day periods.
c. There is a 5% chance that portfolio losses should exceed USD 2 million during each of the next ten trading days.
d. There is a 95% chance that portfolio losses should exceed USD 2 million during each of the next ten trading days.
Correct answer: b
Explanation: The correct answer is b. A 95% confidence level means that there is a one-in-20, or a 5% chance,
that a loss should exceed the portfolio VaR over the time period that the VaR specifies. In this case, the 10-
day VaR of 2 million indicates that the portfolio should be expected to lose more than $2 million once in every
20 ten-day periods
Reading reference: Les Clewlow and Chris Strickland. Energy Derivatives: Pricing and Risk Management.
Chapter 10.
26. Counterparty risk creates a risk profile most similar to what position?
a. Long futures
b. Short futures
c. Long option
d. Short option
Correct answer: d
Explanation: The correct answer is d. Counterparty risk creates an asymmetric risk profile; when a counter-
party defaults its trading partner will lose if the MtM is positive, but it will not gain if the MtM is negative. This
is analogous to a short option position.
Reading reference: Jon Gregory. Counterparty Credit Risk and Credit Value Adjustment: A Continuing
Challenge for Global Financial Markets, Chapter 8, page 124.
27. Under what circumstances should a company dedicate its resources to risk mitigation rather than risk prevention
activities?
a. When the probability of a risk event is high but its potential impact is small.
b. When the probability of a risk event is low but its potential impact is large.
c. When the probability of a risk event is low and its potential impact is small.
d. The primary focus should always be on risk prevention activities.
Correct answer: b
Explanation: The correct answer is b. Using the Risk Treatment Selection Criteria outlined by Fraser and
Simkins, the focus should be placed on risk mitigation, rather than risk prevention activities, when the proba-
bility of an event occurring is low but its potential impact is large.
Reading reference: John Fraser and Betty Simkins, Enterprise Risk Management: Today’s Leading Research
and Best Practices for Tomorrow’s Executives, Chapter 16, pages 292 -293.
28. Under a concessionary system, what compensation is a production company entitled to receive from a host
country if exploration efforts fail to find commercially viable oil or gas fields?
a. Reimbursement of total exploration costs incurred.

b. A pro-rata reimbursement of exploration costs incurred based on total original cost estimates.
c. Reimbursement of drilling costs only.
d. No reimbursement.
Correct answer: d
Explanation: The correct answer is d. Under a concessionary system, the E&P company assumes all the risks
associated with exploring for oil and gas reserves. If their prospecting fails to find a viable reserve, the E&P
company must bear all of the costs; the host country does not bear any responsibility for these costs.
Reading reference: Charlotte Wright & Rebecca Gallun. Fundamentals of Oil & Gas Accounting, Chapter 15, page 679.
29. A British crude oil marketer has a one year obligation to deliver 350,000 barrels of Brent Blend crude oil at a
fixed price FOB to a refiner in Belgium on a monthly basis. The marketer believes that the current forward
curve (see below) is too steep and expects it to flatten significantly. Which of the following trades will the
marketer most likely execute given its current market view?
139
Crude Price (USD)
134
129
124
119
114
0 3 6 9 12 15 18
a. Exchange for Physical

b. Stack hedge
c. Strip hedge
d. Swing swap
Correct answer: b
Explanation: A stack hedge would be best in this situation. If the marketer believes the curve is too steep and
likely to flatten, they would be best served by locking in the entire obligation (12 months or 4.2 million barrels)
at the near term price. That way, if the curve does flatten, the marketer will “gain” (compared to using a strip
hedge) by not having locked in the farther out strips at higher prices.
Reading reference: Robert McDonald, Derivatives Markets, 3rd Edition, Chapter 6, pages 186-187.
30. Consider the following observed price data for two different commodities over a four-day period. What is the
best estimate of price correlation between the two commodities?
Commodity A Commodity B
Day 1 3.65 108.2
Day 2 3.43 114.35
Day 3 3.53 110.36
Day 4 3.32 113.5
Sample mean 3.4825 111.6025
a. -0.9
b. -0.25
c. 0.25
d. 0.9
Correct answer: a
Explanation: The correct answer is a. With an understanding of correlation this question can be answered
intuitively by looking at the chart, since in each instance, when commodity A is above its mean, commodity B
is below its mean. This would imply a negative correlation close to 1, and since the other answers are far away
from that, A can be safely chosen without doing the calculation.
The correlation can be calculated as follows:
Commodity A Commodity B (A − μa) * (B – μb)
Day 1 3.65 108.2 -0.56991875
Day 2 3.43 114.35 -0.14424375
Day 3 3.53 110.36 -0.05901875
Day 4 3.32 113.5 -0.30834375
Sample mean 3.4825 111.6025
Sample standard deviation 0.141 2.844
Covariance: 𝜌𝑎𝑏 =𝑠𝑢𝑚 𝑜𝑓 𝑓𝑜𝑢𝑟 terms 𝑐𝑜𝑣𝑎𝑟𝑖𝑎𝑛𝑐𝑒 -0.3605

(𝑛−1), 𝑜𝑟 3
Correlation ρab/σaσb -0.9001
Since the sample mean is derived from the observations, one must divide by (n-1) and not n, to account for
the lost degree of freedom. This makes the correlation calculation -0.9 and not -0.65 as it would have been if
the means had been known previously rather than taken from the sample.
Reading reference: James Stock and Mark Watson. Introduction to Econometrics: Brief Edition, Chapter 2.
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ERP Practice Exam 3 Candidate Answer Sheet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3

ERP Practice Exam 3 Questions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5

ERP Practice Exam 3 Answer Sheet/Answers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17

ERP Practice Exam 3 Explanations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .19

Introduction Suggested Use of Practice Exams

16. Correct way to complete

18. Wrong way to complete

* Expenses in USD MMs Year 0 (now) Year 1 Year 2 Year 3

• Projected average price of crude oil produced: USD 95/bbl

Questions 4 - 5 use the information below:

a. Settlement risk increases.

Coal Reserves Sulfur Ash Moisture Volatile Matter Fixed Carbon

a. Black Thunder, Cordero, Bowie, Seneca

a. A credit support annex

• Cap: USD 125/bbl

The monthly MOPS Index per barrel prices are as follows:

• June – USD 132 • September – USD 128

a. The airline receives USD 300,000

a. Above ground tank storage

• Point of delivery price – USD 76/MWh

• Fixed payer (buyer): Refiner

Which variable corresponds to the 2-year swap price?

15. Credit risk exposure is best defined by which of the following?

a. The sum of settlement risk and replacement risk

• Grid load: 240,000 MWh

• Trade date: January 25

Questions 21 - 23 use the information below:

a. Reimbursement of total exploration costs incurred.

a. Exchange for Physical

16. Correct way to complete

18. Wrong way to complete

* Expenses in USD MMs Year 0 (now) Year 1 Year 2 Year 3

• Projected average price of crude oil produced: USD 95/bbl

Explanation: The correct answer is a.

Year 0 Year 1 Year 2 Year 3

Questions 4 - 5 use the information below:

a. Settlement risk increases.

Coal Reserves Sulfur Ash Moisture Volatile Matter Fixed Carbon

a. Black Thunder, Cordero, Bowie, Seneca

a. A credit support annex

• Cap: USD 125/bbl

The monthly MOPS Index per barrel prices are as follows:

• June – USD 132 • September – USD 128

a. The airline receives USD 300,000

a. Above ground tank storage

• Point of delivery price – USD 76/MWh

• Fixed payer (buyer): Refiner

Which variable corresponds to the 2-year swap price?

15. Credit risk exposure is best defined by which of the following?

a. The sum of settlement risk and replacement risk

• Grid load: 240,000 MWh

• Trade date: January 25

Questions 21 - 23 use the information below:

a. Reimbursement of total exploration costs incurred.

a. Exchange for Physical

The correlation can be calculated as follows:

Commodity A Commodity B (A − μa) * (B – μb)

Day 1 3.65 108.2 -0.56991875

Day 2 3.43 114.35 -0.14424375

Day 3 3.53 110.36 -0.05901875

Day 4 3.32 113.5 -0.30834375

Sample mean 3.4825 111.6025