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ERP
LEARNING OBJECTIVES
®
ENERGY RISK PROFESSIONAL (ERP) PROGRAM Each year, Certified ERPs from a variety of disciplines
The Global Association of Risk Professionals (GARP) and geographies are invited by GARP to participate in the
created the ERP Certification Program for energy exam development process. GARP’s dual collaboration
market and risk professionals seeking a designation with EOC members and its Certified ERP alumni helps to
ensure that the ERP Exam and exam curriculum remain
that assesses and validates their knowledge and
consistent with current industry practice.
skills. Certified ERPs can apply knowledge about the
production, transportation, and storage of physical
2018 ERP LEARNING OBJECTIVES AND STUDY GUIDE
energy commodities; structure and practical application
The learning objectives are a valuable exam development
of energy derivatives; assessment of energy market data
tool that candidates should reference, along with the
and price modeling; and identification, measurement, and
2018 ERP Study Guide, when preparing for the Exam.
management of risk in the energy industry.
Each exam question is developed from and directly
references a specific reading and related learning
ERP CURRICULUM
objective. Candidates are expected to be familiar with
Development of the ERP Exam curriculum is guided by
and able to apply the learning objectives on the ERP
GARP’s Energy Oversight Committee (EOC), a panel of
Exam Part I and Part II, respectively.
senior practitioners and academics with practical energy
market experience and risk management expertise. The
2018 ERP STUDY GUIDE CHANGES
exam topics and required readings listed in the 2018 ERP
Returning 2017 ERP candidates should also review
Study Guide and 2018 Learning Objectives (LOBs) are
the 2018 ERP Study Guide Changes. This document
updated annually in conjunction with the EOC to ensure
summarizes all readings removed from the 2017
the ERP Exam remains a timely and accurate assessment
curriculum and includes new readings added for 2018.
of the knowledge and skills required of energy market
and risk professionals.
COMMONLY-USED CONTRACT SPECIFICATIONS
Exchange-traded energy commodity futures and option
ERP EXAMS
contracts are typically transacted in standardized lot
The ERP Exam Part I and Part II evaluate a candidate’s
sizes. Unless otherwise noted, exam questions will assume
knowledge of key concepts aligned with the topics below:
the following standard volumetric terms:
LEARNING OBJECTIVES
Part I
2018 Energy Risk Professional (ERP®) Learning Objectives Part I
The four hour ERP Exam Part I consists of 80 multiple choice questions. The Exam structure has been designed
in conjunction with the EOC to assess learning outcomes associated with the physical energy commodity markets
based on the following topics and weights:
1. Andrew Inkpen and Michael H. Moffett, The Global Oil and Gas Industry: Management, Strategy and Finance.
(Tulsa, OK: PennWell Books, 2011).
Chapter 3. Access, Leasing, and Exploration
• Summarize the process of accessing new reserves and outline the steps involved in developing a petroleum project.
• Explain how key subsurface geological structures affect oil and gas production; e.g., permeability versus porosity.
• Identify the ownership of subsurface mineral and resource rights based on jurisdiction and market assumptions.
• Compare the fiscal regimes used in international petroleum agreements.
• Describe the typical components of a lease agreement and methods used to establish royalty payments.
• Compare and contrast the physical and economic characteristics associated with various reserve classifications
(e.g., proved, developed, undeveloped, P90), including conventional and unconventional reserves.
• Define reserve replacement and reserve life; determine their values given a set of market assumptions.
• Describe the effect of various field value assumptions on bidding strategies in lease auctions.
Chapter 10: The Market for Crude Oil (Crude Oil Fundamentals and The Price of Crude Oil sections only)
• Explain the evolution of crude oil pricing in recent decades due to market and political forces.
• Differentiate between various grades of crude oil based on chemical composition and physical characteristics that
include: sulfur content, gravity, and viscosity.
• Distinguish between various global benchmark crudes and understand the role of benchmark prices in the global
crude oil market.
• Distinguish between spot, forward, and futures transactions in the crude oil markets.
• Describe the factors that affect a crude oil futures contract and determine its value given a set of market assumptions.
2. An Introduction to Petroleum Refining and the Production of Ultra Low Sulfur Gasoline and Diesel Fuel.
The International Council on Clean Transportation. (MathPro, October 2011).*
• Identify the major classes of refineries and explain the key characteristics that determine a refinery’s product yield.
• Differentiate between various units of the refinery complex and the primary inputs (feedstock) and the product
outputs associated with each.
• Explain the refining process, including separation, distillation, conversion, blending and finishing, and
maintenance scheduling.
• Identify and describe key blending practices for standard gasoline and diesel blendstock, including the use
of ethanol.
• Explain why and how the sulfur content of gasoline is reduced in the refining process.
• Identify and describe the primary characteristics of refined product classifications including light distillates
(liquefied petroleum gas, gasoline, naphtha), middle distillates (kerosene, jet fuel, diesel fuel) and heavy distillates
and residuum (heavy fuel oil, lubricating oils, paraffin wax, asphalt/tar, petroleum coke).
3. Charlotte Wright, Fundamentals of Oil & Gas Accounting, 6th Edition. (Tulsa, OK: PennWell Books, 2017).
Chapter 15. Conveyances (pp. 557 - 582 only)
• Define conveyances and the types of interests covered under a conveyance, including working interests, royalty
interests, production payment interests, and net profits interests.
• Describe the circumstances in which a farm-in or farm-out arrangement would be used.
• Define the term sole risk, under what circumstances sole risk can arise, and its financial implications.
• Understand how a working interest may be sold to a third party; calculate the payouts distributed under a
working interest.
• Explain how working and nonworking interests are affected by pooling or unitization decisions and how the
interests are valued after pooling or unitization.
5. Allegro Energy Group, How Pipelines Make the Oil Market Work – Their Networks, Operation, and Regulation.
(December 2001).*
• Describe how crude oil pipeline networks operate and are regulated; explain the scheduling and operational
challenges associated with balancing seasonal and regional consumption patterns.
• Calculate pipeline economics when given a set of market assumptions.
• Compare the relative economics, advantages, and disadvantages of transporting crude oil via waterborne
shipments, railroad tank cars, trucks, and pipelines.
• Understand interregional flows and how the oil market’s infrastructure moves oil from producing regions to
consuming regions.
• Explain the central role of hubs and understand how pipeline networks move products across the United States.
• Understand how petroleum products are physically sequenced in a pipeline flow.
• Define nominated volumes and apportionment and explain their role in scheduling product flow.
6. Oil and Gas Exploration and Production Lending. (Office of the Comptroller of the Currency, March 2016).*
• Identify risk factors associated with oil and gas production lending and explain how these risks can arise.
• Explain guidelines for the governance of production lending operations, including underwriting, financial analysis
and valuation of collateral, assessment of engineering reports, and equipment.
• Explain guidelines and best practices for monitoring and documenting performance of a lending portfolio.
• Describe guidelines for assigning a rating to oil and gas production loans.
NATURAL GAS
} Physical properties of natural gas
• Types of natural gas, units of measure, and heat content
• NGLs and condensates
} Global natural gas markets and economic fundamentals
• Market dynamics and pricing
• Gas sales agreements and trading
} Transportation and storage economics
} LNG
• Market dynamics and pricing
• Contracts and shipping
COAL
} Physical properties of coal
• Types of coal, units of measure, and heat content
• Benchmarks, contract specifications and trading
• Global coal markets and economic fundamentals
} Transportation
1. Vincent Kaminski, Managing Energy Price Risk, 4th Edition. (London, UK: Risk Books, 2016).
Chapter 7. US Natural Gas Markets
• Describe the primary drivers of seasonality observed in natural gas consumption and explain the impact of
seasonality on natural gas storage, injection, and withdrawal.
• Define basis in the natural gas markets and explain the primary drivers of basis differentials.
• Describe the key physical and financial components of natural gas markets in the US.
• Identify US natural gas benchmark contract specifications and explain the use of benchmark contracts in natural
gas trading.
• Describe and assess the mechanics, application, and valuation of natural gas swaps.
• Structure and apply a fixed-for-floating, a floating-for-floating, and a natural gas basis swap; calculate a swap
settlement for each.
3. Anthony J. Melling, Natural Gas Pricing and its Future: Europe as the Battleground. (Carnegie Endowment, 2010).*
Chapter 1. The Development of European Gas Contracting
• Describe the structure of natural gas spot markets in Europe.
• Explain why netback pricing is used and calculate a netback price from a set of inputs.
• Explain the mechanics of clauses commonly found in European gas sales agreements, such as price review and
capacity charges.
4. Jonathan Stern and Howard Rogers, The Dynamics of a Liberalised European Gas Market – Key Determinants of
Hub Prices, and Roles and Risks of Major Players. (Oxford Energy, December 2014) Sections 1.1 – 1.4 only.*
• Compare the price evolution and historical patterns of European wholesale natural gas prices to oil-indexed prices.
• Explain factors driving the change from long-term contracts to hub-based trading and the steps taken by some
market participants to maintain oil-index pricing methods.
• Explain why prices among European hubs have diverged during the past few years.
• Describe the origin of natural gas supplies for European hubs, including price determinants for imported gas.
5. Michael D. Tusiani and Gordon Shearer, LNG: Fuel for a Changing World - A Nontechnical Guide - 2nd Edition.
(Tulsa, OK: PennWell Books, 2016).
Chapter 12. LNG Project Formation
• Explain the basic operation of an LNG train and the steps in the LNG liquefaction process.
• Describe the contractual arrangements used in LNG production, sale, and transportation.
• Identify and describe the necessary components for the establishment and development of an LNG project;
understand the benefits and challenges of each.
• Assess the development and impact of market pricing mechanisms, including the use of the JCC, S-curve, and
Henry Hub-linked formulas.
• Describe the factors that mitigate risk in a project finance venture.
6. William Leffler, Natural Gas Liquids: A Non-Technical Guide (Tulsa, OK: PennWell, 2014).
Chapter 6. Refineries and the Unnatural Gas Liquids
• Explain how the various units within a refinery complex produce NGLs and which NGLs are produced by a
specific unit.
• Describe how each type of NGL is applied, both within the refinery and by external consumers.
• Understand why some NGLs are more volatile than others and the steps a refinery will take to safely manage them.
Chapter 7. Logistics
• Understand the basic methods of transporting NGLs by land and the common sizes of transportation vehicles.
• Explain the different methods for moving NGLs by pipeline, including batch shipments, and the challenges involved
with pipeline shipment of NGLs.
• Understand how NGLs are stored in both above ground and underground facilities and the rationale for the use
of each.
7. Chris Le Fevre, Oxford Energy: Gas Storage in Great Britain (January 2013).*
Chapter 2. The Role of Gas Storage
• Describe the role of cushion gas in the operation of a natural gas storage facility and understand how cushion gas
affects the economics of a storage site.
• Differentiate between the major types of natural gas storage facilities and the strengths/weaknesses of each.
• Understand how system operators use storage facilities to provide volume flexibility to natural gas consumers.
• Explain how the market value of storage is determined within a liberalized natural gas market, including its intrinsic
and extrinsic value.
• Identify the broad categories of risk associated with natural gas storage, and how these risks are identified
and evaluated.
} Properties of electricity
• Types of power generation
• Transmission and distribution
} Electricity market economics
• Base load, mid-merit, peak, and off-peak generation
• Capacity factor, heat rate, and spark spread
• Market data and price discovery
} Investing in generating capacity
} Electric energy markets and trading
• Power pools (ISOs and RTOs) and bilateral trading
• Contracts and structured solutions for energy markets
} Liberalized (deregulated) wholesale power market design
• Energy markets (day-ahead vs. real-time) and balancing markets
• Energy only vs. capacity markets
• Ancillary services
• Integration of renewable energy
} Global electricity markets and economic fundamentals
} Emission reduction programs and regulation
1. John E. Parsons, Introduction to Electricity Markets, 2017 Energy Risk Professional (ERP) Exam Part I (Hoboken,
NJ: John Wiley & Sons, 2017)†
Chapter 1. Industry Overview
• Compare the roles of generation, transmission, and distribution in an electricity market.
• Identify different types of electricity markets and compare the roles of different market participants.
Chapter 2. Load
• Define load and explain the characteristics of electricity demand patterns across different time periods.
• Compare baseload generating units, intermediate units, and peaker plants.
• Calculate and interpret the load factor, and explain how the load factor can impact the cost of electricity.
• Interpret a load-duration curve and relate this curve to the economics of electricity generation.
• Describe the process of load forecasting and explain how to account for uncertainty when forecasting loads over
different time periods.
• Describe characteristics of electricity demand (including demand elasticity); construct a demand and supply curve
for electricity and compare factors that influence short-run and long-run demand elasticity.
• Describe and calculate the VOLL.
• Compare electricity demand patterns for retail and industrial consumers.
• Compare different types of demand management and demand response programs.
† All rights reserved. Inquiries concerning reproduction of this section should be made to GARP.
Chapter 3. Generation
• Describe the operating characteristics of the following generation technologies: coal-fired, natural gas-fired,
including combustion turbine and combined cycle gas turbine units, oil-fired and dual-fired generation, nuclear,
hydropower, wind power, and solar, including PV and CSP.
• Calculate and relate the heat rate and the thermal efficiency of a generating plant; explain factors that can impact a
plant’s heat rate and its thermal efficiency.
• Construct and interpret both short-term and long-term operating cost curves; explain factors that impact the
operating cost of a generating plant.
• Apply heat rate and other cost factors to calculate the marginal cost of electricity for a generating plant.
• Compare and calculate the capacity factor and availability factor, and explain how these factors vary for different
types of generating plants.
• Describe the role of and challenges related to energy storage, and compare different energy storage technologies.
Chapter 4. Transmission
• Describe the role of a transmission system and explain the challenges related to electricity transmission.
• Compare and explain how different factors can determine the capacity of a transmission line, including thermal
limits, voltage limits, and angle stability limits.
• Describe active and reactive power and understand their role in voltage control.
• Apply binding constraints to determine the capacity of a transmission line and describe considerations in
determining a safety margin for each type of limit.
• Describe Kirchhoff’s Laws and use these laws to calculate the feasibility of dispatching power on each line in a
hypothetical system with two generators and two transmission lines.
• Describe the role of ancillary services and compare characteristics of different types of ancillary services.
• Define losses in an electrical system and explain different ways how losses can arise.
2. Rafal Weron, Modeling and Forecasting Electricity Loads and Prices. (Hoboken, NJ: John Wiley & Sons, 2006).
Chapter 1. Complex Electricity Markets
• Compare and contrast the operating characteristics of power pools and power exchanges, particularly the
methodology used to establish a market clearing price in each.
• Define and explain the following electricity market terms: nodal, zonal, spot price, and balancing market.
• Differentiate between the types of products and contract types used when buying electricity as a commodity.
• Explain how prices are set in the UK electricity market, including the use of a CFD as a risk management tool.
• Explain how prices are set within the Nord Pool and the two-sided auction; calculate a clearing price from a given
set of inputs.
• Describe energy-only markets; understand the role of price spikes in energy-only markets.
• Identify the market design weaknesses that led to historical price spikes in the U.S. state of California
electricity market.
3. Kenneth Skinner, Heat Rates, Spark Spreads and the Economics of Tolling Agreements. (December 2010).*
• Explain the economic rationale for entering into tolling agreements; identify the risks associated with such
transactions and associated key terms.
• Define heat rates and spark spreads; explain how the concepts of intrinsic and extrinsic value are applied in
tolling agreements.
• Distinguish between operating, economic, and market-implied heat rates.
• Calculate a breakeven fuel cost for a given power purchase price.
4. Quadrennial Technology Review 2015, Chapter 4: Technology Assessments – Solar Power Technologies.
(US Department of Energy, 2015).*
• Describe the key trends and objectives associated with solar technology development.
• Describe the typical cost structure of PV solar installations and summarize trends in global solar installations and
system costs over time.
• Compare and contrast PV and CSP technologies.
5. Rebecca Busby, Wind Power: The Industry Grows Up. (Tulsa, OK: PennWell Books, 2012).
Chapter 6. Wind Farms: Developing and Operating Wind Power Plants
• Identify and explain the key considerations and challenges associated with the development of a wind farm,
including site development, grid interconnection, and energy sales agreements and financing.
• Evaluate key factors that influence power production from a wind installation, including design class, availability,
and the capacity factor.
• Describe how government incentives, including production tax credits, renewable energy credits, and feed-in tariffs
affect the economics of wind and solar projects.
• Identify the economic and operational risks that are typically associated with development of a wind farm.
• Explain the monitoring process for wind power generation system performance and how unplanned maintenance
and operating shutdowns can be minimized.
6. International Renewable Energy Agency (IRENA), Renewable Energy Integration in Power Grids. (April 2015).*
• Explain how an increasing proportion of renewable power capacity on a power grid can impact the system’s
operation, reliability, transmission, and distribution.
• Describe the challenges and technological solutions associated with the integration of variable renewable
generation into a power grid.
• Identify global trends in renewable energy capacity and integration; explain how different countries have addressed
challenges related to variable energy integration.
7. KU Leuven Energy Institute, The Current Electricity Market Design in Europe. (2015).*
• Describe the key features of the Belgian energy-only electricity market, including the forward and future market,
the day-ahead market, the intraday market, and the balancing market.
• Explain methods for the procurement and activation of reserves and the settlement of imbalances.
10. KU Leuven Energy Institute, Storage Technologies for the Power System. (2014).*
• Describe the primary drivers behind the adaptation of storage technologies.
• Compare different electricity storage technologies and assess the viability of each.
11. KU Leuven Energy Institute, Cross-Border Electricity Trading: Towards Flow-Based Market Coupling. (2015).*
• Understand how electricity is traded on a cross-border basis.
• Differentiate between the available transfer capacity and the flow-based approach used to determine cross-border
trading volumes, and describe advantages and disadvantages of each approach.
• Understand how market coupling impacts electricity markets, including typical implementation challenges
12. German Federal Ministry for the Environment, Emissions Trading Basic Principles and Experiences in Europe and
Germany. (November 2016).*
• Explain the mechanics of an ETS and describe potential benefits of implementing an ETS.
• Summarize key considerations to be made when implementing an ETS, including setting the cap, determining scope
and coverage, determining the allocation of allowances, as well as monitoring, verifying and enforcing the ETS.
• Compare flexibility provisions and market stability measures that can be included in an ETS.
• Describe the structure of an emissions trading market, including the roles of different participants.
13. World Economic Forum, The Future of Electricity New Technologies Transforming the Grid Edge. (March 2017).*
• Describe the opportunities provided by the increasing adoption of electric vehicles and digital smart grid
technologies and associated challenges to their more widespread adoption.
• Compare distributed generation, distributed storage, energy efficiency, and demand response; describe their
impact of each technology on electricity demand, and explain challenges to their implementation.
• Explain and assess market design structures designed to encourage the integration of distributed energy resources.
• Explain challenges in developing policies, necessary infrastructure, and customer business models to support
distributed generation and digital energy technologies.
LEARNING OBJECTIVES
Part II
2018 Energy Risk Professional (ERP®) Learning Objectives Part II
The four hour ERP Exam Part II consists of 60 multiple choice questions. The exam structure has been designed in
conjunction with the EOC to assess learning outcomes associated with financial energy products; probability, statistics,
data analysis and energy price modeling; and the identification, measurement, and management of energy market,
counterparty credit, and operational risks, based on the following topics and weights:
1. Jon Gregory, Central Counterparties. (West Sussex, UK: John Wiley & Sons, 2014).
Chapter 2. Exchanges, OTC Derivatives, DPCs and SPVs (Sections 2.1 and 2.2 only)
• Describe the functions of exchanges and explain how an exchange can be used to mitigate risk.
• Compare methods used for the clearing of contracts such as clearings rings and complete clearing; explain the
counterparty risk associated with each method of clearing.
• Compare exchange-traded and OTC markets and explain their uses.
• Identify risks associated with OTC markets and explain how these risks might be mitigated.
2. Robert McDonald, Derivatives Markets, 3rd Edition. (Upper Saddle River, NJ: Pearson Education, Inc., 2013).
Chapter 4. Introduction to Risk Management
• Compare the use of forward contracts and option strategies to hedge risk exposures; describe and calculate the
payoff function and cash flows for each strategy.
• Explain why firms manage risk and engage in hedging transactions.
• Identify scenarios in which hedging activity adds value to a firm or when a firm may choose not to hedge a
risk exposure.
• Describe the mechanics and payoff profiles of call and put options; identify when an option contract is in-, at-, or
out-of-the-money.
• Explain how collar strategies are used to hedge market risk, including zero-cost and pay-later strategies.
• Explain how firms apply cross-hedging strategies to aggregate risk, reduce risk and create value.
• Describe how the price correlation between two assets affects the optimal hedge amount in a cross-hedging strategy.
Chapter 6. Commodity Forwards and Futures (Sections 6.1 to 6.3, and 6.6 to 6.8 only)
• Describe forward and futures contacts including their economics and how they are used to hedge market risk or an
obligation to buy or sell a commodity; explain the basic equilibrium formula for pricing commodity forwards.
• Explain the relationship between spot, forward, and futures prices; identify challenges related to price formation of
energy futures.
• Describe and compute no arbitrage pricing, with and without storage, for forward and futures positions.
• Describe basis risk and how it can be created when hedging the price risk on a commodity exposure.
• Differentiate between a strip hedge and a stack hedge; explain the market conditions that favor implementing one
versus the other.
• Provide examples of cross-hedging, such as assessing the process of hedging jet fuel with crude oil and using
weather derivatives.
• Calculate CDDs and HDDs; understand how CDDs and HDDs are applied in transactions to hedge weather
related risk.
• Construct a synthetic commodity position and use it to explain the relationship between the forward price and the
expected future spot price.
3. Glen Swindle, Valuation and Risk Management in Energy Markets. (New York, NY: Cambridge University
Press, 2014).
Chapter 2. Forwards and Carry
• Define carry markets and calculate the forward price of a commodity with storage costs.
• Compare the characteristics of physically delivered vs. financially-settled transactions.
• Explain the mechanics of an EFP transaction.
• Explain the dynamics of NYMEX WTI futures contract expiration.
• Explain how forward price curves are derived; differentiate between contango and backwardation.
• Explain the structure and economics of transactions used to store physical commodities, including a park-and- loan
storage transaction.
• Define convenience yield and describe how it can be used to explain contango in a forward price curve.
• Define and apply standard terms found in financial energy contracts, including, lot, open interest, and EFP.
5. Betty J. Simkins and Russell E. Simkins, editors, Energy Finance and Economics: Analysis and Valuation, Risk
Management, and the Future of Energy. (Hoboken, NJ: John Wiley & Sons, 2013).
Chapter 11. Real Options and Applications in the Energy Industry
• Define and apply the concepts of real options, including their practical application and valuation.
• Describe different types of real options (e.g., option to expand, option to exercise) and identify the circumstances in
which each may be applied.
6. S. Mohamed Dafir and Vishnun N. Gajjala, Fuel Hedging and Risk Management. (Hoboken, NJ: John Wiley &
Sons, 2016).
Chapter 2. Major Energy Consumers and the Rationale for Fuel Hedging
• Describe the risks facing major fuel-consuming industries, including airlines, shipping, oil refining, and power
generating industries.
• Explain the potential benefits of hedging; identify how to minimize risk by structuring a hedge given a set of
market assumptions.
• Classify energy market participants based on their economic motivations and exposure to commodity prices;
determine how each would be categorized as a hedger, speculator, or arbitrageur.
• Outline the stages involved in a typical physical spot transaction and explain the risks at each stage.
• Understand the payoff profiles of call and put options; differentiate between American, European, and Asian options.
Risk Assessment and Energy Price Modeling – Part II Exam Weight | 20%
The broad areas of knowledge covered in readings related to Risk Assessment and Energy Price Modeling include
the following:
1. Michael Miller, Mathematics and Statistics for Financial Risk Management, 2nd Edition. (Hoboken, NJ: John Wiley
& Sons, Inc., 2013).
Chapter 2. Probabilities
• Differentiate between continuous and discrete random variables.
• Distinguish between the probability density function, the cumulative distribution function, and the inverse
cumulative distribution function.
• Calculate the probability of an event given a discrete probability function.
• Differentiate between independent and mutually exclusive events.
• Calculate joint probability using a probability matrix.
• Define and differentiate between conditional and unconditional probabilities; calculate the conditional probability
using assumptions for a given scenario.
Chapter 3. Basic Statistics (Sections on Averages through Kurtosis, pp. 29-53 only)
• Apply and interpret the mean, standard deviation, expected value, and variance of a random variable.
• Calculate and interpret the covariance and correlation between two random variables.
• Calculate the mean and variance for a set of variables.
• Define and interpret the minimum variance hedge ratio.
• Describe the four central moments of a statistical variable or distribution: mean, variance, skew, and kurtosis.
• Interpret the skew and kurtosis of a statistical distribution.
Chapter 4. Distributions (Sections on Parametric Distribution through Student’s t Distribution, pp. 61-79 only)
• Identify the distinguishing characteristics of parametric and nonparametric distributions.
• Differentiate between the following distributions: uniform, Bernoulli, Binomial, Poisson, normal, standardized
normal, lognormal, chi-squared, and student’s t distribution.
• Describe the properties of independent and identically distributed random variables.
• Describe and apply the central limit theorem.
2. Les Clewlow and Chris Strickland, Energy Derivatives: Pricing and Risk Management. (Sydney, AUS: Lacima
Publications, 2000).
Chapter 2 . Understanding and Analyzing Spot Prices
• Identify and describe characteristics associated with energy spot price behavior, including mean reversion, jumps,
and seasonality.
• Explain the weaknesses associated with using a geometric Brownian motion process to model energy prices.
• Modify assumptions used in the Black-Scholes Merton model to replicate the behavior of energy commodity
spot prices.
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 for a set of price return data; scale volatility for a specific time horizon, describing the volatility
term structure.
• Describe how implied volatility is derived; interpret a volatility smile and explain how it relates to implied volatility.
3. Rafal Weron, Modeling and Forecasting Electricity Loads and Prices. (Hoboken, NJ: John Wiley & Sons, Inc., 2006).
Chapter 2. Stylized Facts of Electricity Loads and Prices (Sections 2.1-2.4 and 2.7 only)
• Explain why price spikes occur in electricity markets and describe their characteristics.
• Identify seasonal patterns in electricity prices and explain modeling approaches to test a series of price returns for
seasonal behavior.
• Explain methods to remove or decompose seasonal trends from a data series.
1. Glen Swindle, Valuation and Risk Management in Energy Markets. (New York, NY: Cambridge University
Press, 2014).
Chapter 16. Control, Risk Metrics and Credit
• Describe the typical model control framework, the process for validating pricing inputs, and the role of consensus
service providers.
• Identify standard risk metrics, and explain methods of modeling risk metrics for liquid assets, illiquid basis positions,
and seasonality in price returns.
• Understand how seasonality poses a challenge for firms which trade in multiple asset classes.
• Understand how credit risk is typically managed in energy portfolios and the role of the CVA desk.
• Explain the use of credit default swaps in hedging credit risk; compare right-way risk with wrong-way risk.
2. John C. Hull, Risk Management and Financial Institutions, 4th Edition. (Hoboken, NJ: John Wiley & Sons, 2015).
Chapter 8. How Traders Manage Risk
• Understand the market risk (Greeks) associated with linear and nonlinear financial products.
• Define delta hedging and explain its application in the immunization of market risk associated with linear and
nonlinear financial products.
• Construct a delta hedge for an option contract or portfolio of options; assess and rebalance a delta hedge for a
given set of price changes.
• Define gamma and explain the relationship between delta and gamma.
• Construct a gamma hedge; calculate the quantity of options necessary to make a portfolio gamma-neutral and
structure a delta-gamma hedge using a combination of options and the underlying asset.
• Define vega and construct a vega-neutral position; calculate the quantity of options necessary to make a portfolio
vega-neutral.
• Define theta and rho as they relate to individual options and option portfolios.
• Understand how dynamic hedging of delta, gamma, vega, theta, and rho is typically done in practice.
• Explain how an exotic option can be hedged and how scenario analysis can supplement monitoring Greek risks.
3. Les Clewlow and Chris Strickland, Energy Derivatives: Pricing and Risk Management. (Sydney, AUS: Lacima
Publications, 2000).
Chapter 10. Value-at-Risk
• Describe limitations in applying VaR as a risk management tool for energy assets.
• Differentiate between the simple moving average and EWMA methods for calculating historical volatility.
• Understand how the decay factor affects output from an EWMA model; explain considerations for selecting the
decay factor.
• Calculate VaR for a two-security energy portfolio given the correlation coefficient between assets; understand the
relationship between correlation and VaR.
• Differentiate between delta VaR, delta-gamma VaR, historical simulations, and Monte Carlo simulations.
• Understand the methodologies for backtesting VaR.
4. Kevin Dowd, Measuring Market Risk, 2nd Edition. (Hoboken, NJ: John Wiley & Sons, 2005).
Chapter 13. Stress Testing
• Understand the benefits of stress testing; identify situations in which stress tests are an effective assessment of risk.
• Compare stress test results to VaR or expected shortfall.
• Identify the challenges in the design and implementation of stress tests.
• Understand scenario analysis, its application, and its potential impact on stress test results.
• Explain mechanical stress tests, including factor push analysis and maximum loss optimization.
5. Markus Burger, Bernhard Graeber, and Gero Schindlmayr, Managing Energy Risk: An Integrated View on Power
and Other Energy Markets, 2nd Edition. (Hoboken, NJ: John Wiley & Sons, 2014).
Chapter 3. Risk Management (Section 3.4 Credit Risk only)
• Differentiate between settlement risk and replacement risk; calculate settlement and replacement risk for an energy
commodity transaction based on a given a set of assumptions.
• Understand and interpret external credit ratings, rating migration, default probabilities, internal ratings, and credit
risk models.
• Identify common quantitative internal rating factors; explain their application and how they differ from external
credit ratings.
• Explain the important credit risk measures used to quantify credit risk, including risk-at-default, expected loss,
potential exposure, and credit VaR; perform a simple calculation of each measure given a set of market inputs.
• Understand and apply expected loss, loss given default, probability of default, potential exposure, and expected
return for a credit risk exposure.
• Understand and apply credit exposure, credit migration, recovery, mark-to-market, replacement cost, default
probability, loss given default and the recovery rate.
• Understand the methods used to reduce credit risk in energy transactions.
6. Jon Gregory, The xVA Challenge: Counterparty Credit Risk, Funding, Collateral and Capital, 3rd Edition.
(Hoboken, NJ: John Wiley & Sons, 2015).
Chapter 4. Counterparty Risk (Sections 4.1 to 4.3 only)
• Differentiate between counterparty risk and lending risk, identifying situations where such risks can arise.
• Differentiate between settlement risk and pre-settlement risk.
• Define credit exposure, credit migration, recovery, mark-to-market, replacement cost, default probability, loss given
default, and the recovery rate.
• Identify and describe the different tools available to manage or mitigate counterparty risk.
• Compare the use of CVA and credit limits in managing and quantifying counterparty risk.
Chapter 12. Default Probabilities, Credit Spreads and Funding Costs (Sections 12.1 to 12.2.5 only)
• Calculate risk-neutral default probabilities, and compare the use of risk-neutral and real-world default probabilities
in pricing derivative contracts.
• Explain how credit default swap spreads can be used in estimating default probabilities.
7. Aswath Damodaran, Country Risk Determinants, Measures and Implications – 2015 Edition. (July 2015) (Pages 1
to 39 only).*
• Identify sources of country risk; understand how the economic life cycle, political climate, legal system, and
economic structure of a country can affect its risk exposure.
• Compare instances of sovereign default in both foreign currency debt and local currency debt, and explain common
causes of sovereign defaults.
• Identify factors that influence the level of sovereign default risk; explain and assess how rating agencies measure
sovereign default risks.
• Understand the consequences of sovereign default.
• Describe the advantages and disadvantages of using the sovereign default spread as a predictor of defaults.
8. James Lam, Implementing Enterprise Risk Management – From Methods to Applications. (Hoboken, NJ: John
Wiley & Sons, 2017).
Chapter 7. The ERM Framework
• Explain the rationale for developing an ERM framework and describe elements of an ERM framework.
• Compare the 2004 COSO (Committee of Sponsoring Organizations of the Treadway Commission) framework, the
Australia-New Zealand ERM framework, and the Continuous ERM model, describing characteristics of each.
• Describe recommended practices for the development and governance of an ERM framework.
9. Shyam Venkat and Stephen Baird, Liquidity Risk Management – A Practitioner’s Perspective. (Hoboken, NJ: John
Wiley & Sons, 2016).
Chapter 3. Liquidity Stress Testing
• Differentiate between types of liquidity, including funding, operational, strategic, contingent, and restricted liquidity.
• Explain how a liquidity stress testing model is built, including the development of scenarios.
• Understand how changes in different assumptions can impact the result of a liquidity stress test model.
• Understand how metrics from a liquidity stress test should be reported and integrated into results from other
risk models.
• Describe best practices for the governance and control of stress testing frameworks.
10. Michel Crouhy, Dan Galai, and Robert Mark, The Essentials of Risk Management, 2nd Edition (New York, NY:
McGraw Hill Education, 2014).
Chapter 17. Risk Capital Attribution and Risk-Adjusted Performance Measurement
• Define, compare, and contrast risk capital, economic capital and regulatory capital; explain methods and
motivations for using economic capital approaches to allocate risk capital.
• Understand the RAROC methodology and its use in capital budgeting; use RAROC to compare the performance of
different business units.
• Explain the challenges that can arise when using RAROC for performance measurement, including choosing a time
horizon, measuring default probability, and choosing a confidence level.
• Calculate the hurdle rate for a project and use this benchmark to determine the viability of a project.
• Calculate various risk-adjusted performance measures, including RAROC, return on capital, and economic value
added; compute the adjusted RAROC for a project to determine its viability.
11. World Energy Perspectives: The Road to Resilience 2016 Managing Cyber Risks (World Energy Council, 2016).*
• Define cyber risks, their components, and potential impact cyber risks can cause.
• Identify how energy organizations can build resilience to cyber risks.
• Describe how organizations serving the energy industry can contribute to mitigating cyber risks.
12. John Fraser, Betty Simkins, and Kristina Narvaez, Implementing Enterprise Risk Management: Case Studies and
Best Practices (Hoboken, NJ: John Wiley & Sons, 2015).
Chapter 4. Value and Risk: Enterprise Risk Management at Statoil
• Describe how senior management can support the implementation of ERM across a firm.
• Identify the primary objectives of Statoil’s ERM framework and describe challenges in its implementation.
• Understand how firms can optimize total risk in a given scenario.
• Identify and describe key risk metrics and performance indicators typically used to measure and quantify risk.
• Apply lessons learned from the Statoil ERM case study to a given scenario.
Chapter 20. Implementing Risk Management within Middle Eastern Oil and Gas Companies
• Describe cultural and operational challenges associated with implementing a sustainable ERM program using the
Middle Eastern Oil and Gas Companies (MECO) case as an example.
• Identify and describe key metrics used to consolidate, measure, and prioritize business line and
corporate-level risks.
• Apply lessons learned from the MECO ERM case study to a given scenario.
garp.org
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