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Garp Erp Program Manual 31615
Garp Erp Program Manual 31615
Garp Erp Program Manual 31615
ERP
Program
Manual
Table of Contents
Introduction...........................................................................................................................................................1
Introduction
board level.
The ERP Program is overseen by GARPs Energy Oversight
In the areas of nancial and energy risk management,
THE ERP
PROGRAM
Earning the ERP is a great way to dierentiate yourself from industry
peers, and demonstrates to employers that you possess the knowledge
and skills necessary to assess threats and opportunities across the energy
value chain.
More than 90% of candidates who sat for the exam since 2009 have indicated they would recommend the ERP Program to a friend or colleague.
Exam Structure
Project Development
Rened Products
15%
21 questions
10%
14 questions
5%
7 questions
Power
Once certied, ERPs are required to complete 40 hours
Renewable Generation
20%
28 questions
Section Total
50%
70 questions
Financially Traded
technology.
Energy Products
15%
21 questions
15%
21 questions
15%
21 questions
5%
7 questions
Section Total
50%
70 questions
Language Requirements
kW: Kilowatt
MtM: Mark-to-Market
per contract
MW: Megawatt
per contract
per contract
OTC: Over-the-Counter
per contract
VaR: Value-at-Risk
Oxygen Blending
EXAM
LEARNING
OBJECTIVES
The ERP is a comprehensive exam and you are expected to be familiar with a broad
range of energy risk management concepts and techniques. Detailed information
regarding the knowledge domains covered by the Exam, as well as the specic recommended readings and learning objectives for each of these readings are detailed in this
section. Approximate ERP Exam weightings for each knowledge domain are provided.
This information is intended to help guide you through the self-study process as these
learning objectives form the backbone of the exam itself. You should be prepared to
answer questions on any of the individual knowledge points.
PHYSICAL
ENERGY
COMMODITIES
AND
ELECTRICITY
MARKETS
The following is a detailed summary of
specic learning objectives for the required
readings in the 2015 ERP Study Guide.
Learning objectives highlight the specic
areas of knowledge that candidates are
expected to understand and apply after
reviewing a required reading. All exam questions are developed from and linked directly
to individual learning objectives.
Concessionary agreements
Contractual systems
Understand and apply the concept of unitization in the development of Joint Development Zones (JDZs).
Assess the nancial viability of a project using Net Present Value (NPV), Internal Rate of Return (IRR), and other
available nancial metrics.
Calculate and interpret the Weighted Average Cost of Capital (WACC) for a company.
Classify pre-completion, post completion and macroeconomic risks and explain their impact on project development
decisions.
Summarize the key challenges, failures, or risks associated with the various case studies provided.
Dierentiate between the various scal regimes used in hydrocarbon production contracts and understand how the
Calculate the cashow for a petroleum company under a royalty/tax nancial system and a production sharing
Interpret the use of secondary contractual features like signature bonuses, and identify the circumstances in which
Assess the nancial viability of a hydrocarbon project based on production volumes and petroleum prices.
Demonstrate how the mineral rights for an oil and gas eld are applied using the sub-Saharan case study as
an example.
Charlotte wright and Rebecca Gallun. Fundamentals of Oil & Gas Accounting, 5th Edition (Tulsa, OK: Pennwell, 2008).
Chapter 15. Accounting for International Petroleum Operations [MP-03]
Dierentiate the characteristics of various scal systems used in global petroleum contracts including: concessionary,
contractual, and production sharing/service agreements.
Calculate the economic revenue generated from various global petroleum contracts.
Illustrate the application of a joint operating agreement and the circumstances when it is used.
Dene dierent types of real options (option to expand, option to exercise, etc.) and identify the circumstances in
which they are employed.
Understand the valuation of real options and assess a real option on a hypothetical project.
Describe how Black-Scholes, binomial trees, and Monte Carlo simulations are used to value real options; identify the
challenges associated with each approach.
william Bailey, Benoit Couet, Ashish Bhandari, Soussan Faiz, Sunaram Srinivasan and Helen weeds. Unlocking the Value
of Real Options (Oileld Review, 2004).* [MP-05]
Apply a binomial lattice to value a project; calculate the up or down move at various steps on the lattice using a given
set of assumptions.
Interpret output from a real option valuation and apply it to a switching or salvage decision for an existing oil/gas project.
Upstream economics including: wellhead price, break-even price and tax allocations
Unconventional oil
Petroleum Rening
Renery complexity
Crack spread
Unconventional Oil
Identify and describe the broad categories of upstream costs, and understand how specic costs impact an energy
companys earnings.
Explain why crude oil production costs vary by location and demonstrate how production costs can create a competitive
advantage for a specic crude oil eld.
Assess the economic performance of an oil well, including: operating protability, break-even price, working interest and
tax allocations.
Classify and describe the costs and factors associated with the enhancement and ongoing production of an oil eld,
with particular focus on primary, secondary and tertiary recovery methods.
Assess terms of a partnership management agreement; determine how duties are shared and how disputes are settled
within the framework of the arrangement.
Understand the nature of relationships, incentives, and potential conicts between various stakeholders along the oil and
gas supply chain.
Identify and assess political risks that impact crude oil production decisions.
Identify the various physical properties of crude oil and the impact they have on market pricing.
Understand the role of benchmark prices in the global crude oil market.
Demonstrate how the price of a specic crude oil stream is linked to a benchmark crude.
Distinguish between spot, futures and contract transactions in the crude oil markets.
Understand the factors that aect the valuation of a crude oil futures contract; perform a valuation of crude oil futures
contract given a set of market assumptions.
Calculate royalty and tax payments associated with a typical petroleum contract using a given set of contractual terms.
Explain the physical and nancial characteristics of Brent oil, the role of dated Brent, Brent complex, and the use of
Contracts for Dierences (CFDs) in trading Brent.
Describe the physical and nancial characteristics of West Texas Intermediate oil.
Understand the impact pipeline constraints can have on WTI pricing and the use of the P-plus price.
Identify market factors that can cause benchmark crude oil prices to diverge from each other; use the historical
relationship between WTI/Brent and WTI/LLS as a basis.
Understand the market factors that have prompted the emergence of the Dubai-Oman benchmark and discuss the
issues surrounding its adoption and operation.
Develop a plan for transporting dierent types of rened products through a pipeline that will minimize batch cutting,
over-wash and transmix.
Identify dierences between demand-driven, supply-driven, and market-driven scenarios, and explain how they impact
pipeline development decisions.
Understand how political, economic and logistical challenges can impact the construction of pipelines.
Be familiar with challenges related to the various pipeline systems identied; summarize key points in the Baku-TbilisiCeyhan (BTC) Pipeline case study.
Summarize the evolution of oil tanker design and the economics of tanker charter over time.
Understand the rationale for using the Worldscale pricing system for shipments of crude oil.
Describe dierent classes of oil tankers; understand the transport limitations (e.g., typical route and cargo specication) for each class of tanker.
Identify the common types of charter contracts used for crude oil shipments.
Calculate the cost of transporting a shipment of oil using the Worldscale pricing system.
10
Understand the relative economics associated with the various methods available to transport crude oil; for example:
pipeline, rail, tanker, and other methods.
Explain how pipeline shipment times and unexpected disruptions in shipments can impact commodity traders and
oil consumers.
Summarize the characteristics of dierent types of crude oil storage facilities and explain how storage level reports
are generated.
Discuss the important similarities and dierences between crude oil and natural gas storage methods.
List the primary petroleum inventory storage reports used in the United States and internationally, including the JODI
framework, and understand their impact on the petroleum markets.
Transporting Crude Oil by Rail in Canada (Canadian Association of Petroleum Producers). [COM-06]
Understand the market dynamics driving the rapid increase in crude-by-rail shipments across North America, including
the relative geographic location of crude oil production and rening facilities.
Compare the dierent requirements for transporting light crude oil, heavy crude oil, and bitumen.
Identify the additional steps necessary to transport heavier grades of crude oil and why rail transport can be a better
alternative to pipelines.
Demonstrate knowledge of the operational risks associated with crude-by-rail transport and explain how recent
accidents have prompted new requirements for delivering crude oil by rail.
Compare and contrast the competitive balance between independent reners and integrated oil companies.
Describe the rening process and identify the end-products typically produced.
Dene and explain the various processes related to crude oil rening.
Describe how a renery's complexity aects its choice of crude oil feedstock and the optimal product mix it will
produce; interpret the Nelson Complexity Index.
Assess the economics of renery operations including the relationship between the cost of crude oil and renery
margins and the impact of a renery's complexity on its product mix and prot margin.
Dene crack spread and interpret results of a crack spread calculation using given input and output prices.
Understand how other factors, including location, technology, environmental mandates, capacity utilization, scheduling,
and renery complexity/eciency impact rening economics.
Dene the types of unconventional oils and explain the origin of each; understand the broad categories of unconventional oils, including which are commercially viable and which are more speculative.
Explain how oils are categorized as light or heavy; sweet or sour; and how these designations aect rening decisions
and rening protability.
Discuss how the carbon footprint of unconventional oils diers from that of conventional oil and how governmental
energy policy may be shaped by this dierence.
11
Oil indexation
Physical properties
Dierentiate the properties of natural gas (methane), liqueed petroleum gas, natural gas liquids and condensates;
understand the relationship between each type of gas.
Identify the components of raw natural gas drawn from a reservoir (methane, butane, etc).
Dene and apply terminology associated with natural gas extraction, including: wet, dry, sweet, sour and associated gas.
Understand the nancial and operational reasons for natural gas storage.
Compare and contrast the common physical structures used for storing natural gas.
Understand the mechanics and contractual terms contained in a gas sales agreement (GSA) including: take-or-pay
obligations, nominations, and force majeure.
Explain the nancial and operational considerations related to the sale and transport of LNG.
Understand why LNG prices are indexed to crude oil prices in certain geographic regions (i.e. the JCC price in Japan);
calculate an LNG price using a sample crude oil index.
Andrew inkpen and Michael H. Moett. The Global Oil and Gas Industry: Management, Strategy and Finance.
Chapter 9. Liqueed Natural Gas [NGC-04]
Describe the business structures and contractual arrangements used in LNG production and transportation.
Understand the operation of an LNG train and describe the LNG liquefaction process.
Dierentiate three types of LNG shipping contracts: Free On Board (FOB), Cargo, Insurance and Freight (CIF), and
Delivered Ex Ship (DES); understand the economics associated with each.
Compare the fundamentals of regional LNG markets in the Asia-Pacic region and the Atlantic Basin.
Examine the Gorgon LNG project in Australia and explain how various factors associated with local geography and
reserves aected the project development process.
12
Develop a plan to transport natural gas to a specic destination via a pipeline network.
Describe how pumping station fuel requirements are fullled on a pipeline; evaluate an example.
Identify the xed and variable costs associated with natural gas pipeline charges, including taris.
Create a practical example to illustrate how and why a pipeline may be used to temporarily store natural gas.
Categorize the factors that impact the cost structure of the LNG supply chain; explain LNG transportation and
production technology trends.
Explain how natural gas storage inventories are reported and identify the weaknesses in the reporting methodology.
Apply the following natural gas pricing terms to market operations: wellhead price, border/beach price, hub price,
citygate price, end user price and netback price.
Compare and contrast the eight key mechanisms for pricing natural gas and identify the geographic regions where
each is the dominant pricing mechanism.
Describe the relationship between a local gas pricing mechanism, the observed market price, and the hypothetical
market-clearing price.
Understand how volatility impacts natural gas prices and why oil-linked prices can help mitigate the impact of volatility.
international Energy Agency. Developing a Natural Gas Trading Hub in AsiaObstacles and Opportunities. [nGC-07]
Compare and contrast the three main types of market-based gas pricing mechanisms, explaining the main benet of
each; describe the methods used to establish a price through government regulation.
Assess the development of gas market pricing mechanisms in Asia, including the use of the JCC and S-Curve formulas.
Explain the current dynamics in the Asian natural gas market and understand how supply and transport fragmentation
is aecting the development of a regional pricing mechanism.
Compile a list of market and regulatory factors required for the ecient operation of a natural gas trading hub in Asia
Describe the market mechanisms through which nancial-only transactions aect the price paid for natural gas bought
Identify the risks that market participants will likely face in the development of a natural gas trading hub in Asia.
Compare and contrast the physical properties of anthracite, bituminous, sub-bituminous and lignite coal and know how
physical properties aect the value of coal.
Describe the features of popular coal contracts, including exchange-traded and OTC contracts.
Develop a scenario to demonstrate how volume overages/underages are dealt with in these contracts.
Compare and contrast the economics of coal-red and natural-gas red power plants, and understand the motivations
for fuel-switching decisions (when applicable).
13
Heat rate
Spark spreads
Generation stack
Ancillary services
Capacity payments
Tolling agreements
Capacity payments
Wind economics
System integration
Understand the role the spot (real time) market plays in the reliable operation of an electric grid.
Understand the strategy behind placing or accepting bids and oers on an open electricity market and how the
bidding process sets the wholesale price for electricity.
Explain the role of the system marginal price (SMP) in an electricity pool.
Calculate the settlement of electricity contracts, including instances when imbalances exist.
14
Understand the methods used to determine the amount a customer is willing to pay for electricity, including value of
Identify the economic factors that a power retailer considers, and understand demand forecasting.
Understand the relationship between the marginal cost of generation and market prices.
Evaluate the protability of a generating unit based on a given set of market parameters and operating factors,
including start-up costs.
Apply the internal rate of return (IRR) and minimum acceptable rate of return (MARR) to assess the economic viability
of a plant; explain how a plants operating characteristics impact its IRR.
Understand how a plants utilization factor will aect its IRR, particularly for renewable power installations.
Identify the market factors used to determine power plant upgrade or retirement decisions.
Interpret a load-duration curve and understand its application in the decision to invest in additional power generation
capacity.
Create an auction bid for a peaker plant given a set of market assumptions.
Interpret a three-stage piecewise linear price curve for the electricity market.
Explain how the result from a capacity element (CE) calculation will incentivize construction of additional generation
capacity.
Calculate the cost of transmission between two points on a power grid, using a given set of market parameters.
Understand how Contracts for Dierences (CFD) are applied and evaluate the settlement of a CFD.
Understand how dierences in locational prices impact the settlement of bilateral trades.
Explain how a day-ahead power auction works; be familiar with notation used in a power auction market.
Understand how marginal costs are used to set prices in an auction process.
15
Understand which generator costs are considered nonconvex and the role nonconvex costs play in market clearing prices.
Describe the economic supply and consumer demand conditions that would result in no clearing price being set for
the market.
Discuss how pool prices can optimally produce the least cost price to meet short-term demand and the eect this can
have on long-term capacity issues.
Explain why a generator would incur start-up costs as protection against swings in real-time prices.
Describe real-time market transactions and day-ahead transactions; understand their fundamental dierences.
Understand how side payments are used by RTOs (like PJM) to promote the ecient operation of a power market.
Describe the conditions under which power generators are required to deviate from volume specications in a contract.
Interpret the relationship between real-time pricing and the balancing market.
Analytical Tools and Structured Solutions for Power Markets Learning Objectives
vincent Kaminski. Energy Markets.
Chapter 22. Analytical Tools [EMR-09]
Calculate and compare results for a capacity factor, availability factor, load factor, and demand factor given a set of
Understand and compare the relationship between thermal eciency and the heat rate; use the heat rate to calculate
market assumptions.
the marginal cost of electricity.
Calculate a spark spread, including clean and dark spreads, and understand how they are applied.
Interpret the supply stack (generation stack) and understand its limitations.
Identify sources of data for electricity generation and explain how emission estimates can be derived from published data.
Understand how data about the electricity forward curve, cash market transactions, power/fuel price spreads, and
power outages is collected and reported by price reporting agencies.
Identify challenges associated with modeling and analyzing the operation of hydropower plants.
Identify key challenges and considerations in the implementation of a capacity payments system.
Structure a Financial Transmission Rights (FTR) transaction and calculate its payout.
Dierentiate between auction revenue rights (ARRs) and the FTR auctioning system; construct a practical application
for each.
Identify drawbacks in the application of FTR transactions and understand how credit risk is created.
Explain the mechanics of power pool transactions in the US; identify frequently used block types and time buckets.
Understand why power marketers use full requirements contracts and identify the risks associated with these contracts.
16
Identify challenges associated with modern electricity markets and explain actions that can help resolve these challenges.
Understand the market mechanisms available that can improve the adequacy, generating capacity, and ancillary
services of markets that contain a large proportion of variable renewable energy.
Compare the benets and weaknesses of energy-only markets and capacity markets; identify global examples of
their implementation.
Explain how negative electricity prices can arise and their practical impact on power markets.
Identify challenges related to the implementation of demand response programs and the market rules that can be
adopted to incorporate demand response.
The Impact of Global Coal Supply on Worldwide Electricity Systems: Overview of Europe, the United States, Australia,
Japan, China, and South Africa (iEA Coal industry Advisory Board).* [EMR-12]
Compare and contrast global power market structures, and identify the relative proportion of coal-red generation in
each of the following regions: Europe, the United States, Australia, Japan, China, and South Africa.
Assess the relationship between coal prices and electricity prices in the following regions: Europe, the United States,
Australia, Japan, and China.
Understand and interpret the position of European coal-red generation plants in the merit order curve.
Understand how emissions control programs, like the EU Emissions Trading Scheme and carbon taxes, impact the
operating economics of coal-red generators and local electricity prices.
Understand the relationship between coal prices and natural gas prices in various global markets.
Bo Shen, Girish Ghatikhar, Chun Chun ni, and junqiao dudley. Addressing Energy Demand Through Demand Response
(Berkeley national Laboratory, june 2012).* [EMR-13]
Sections 1 to 3 only
Dene demand response (DR) and understand how DR works to curtail shortages on a power grid.
Understand how government policy and market deregulation have been instrumental in the creation of DR programs.
Understand how bilateral DR programs like cost recovery and demand-side management (DSM) operate.
17
Identify and assess the steps and challenges associated with the development of a wind farm, including site selection,
turbine selection, grid interconnection, modeling and initial design, the spacing and siting of turbines, energy sales
agreements, contracting, and nancing.
Evaluate key factors that inuence power production from a wind installation, including design class, availability, and
Understand and assess the economic impact on wind projects created by government incentives, including production
Identify risks that are typically associated with development of a wind farm.
Explain how the performance of wind installations is monitored, and understand how unplanned maintenance and
operating shutdowns can be minimized.
Assess the impact of base-load power plants, demand response programs, and wind generation on the operation and
reliability of a power grid.
Identify the sources of power that are most likely to serve as backup generating capacity or spinning reserves.
Summarize the challenges related to the integration of wind generation on a power grid, particularly as the penetration
of wind capacity relative to total power capacity increases.
Identify solutions to reduce the economic cost of integrating wind power to the grid.
Develop scenarios that could result in the curtailment of wind power production.
Identify and apply techniques to forecast and model wind power production.
jeery Altman, Ross Board, Felix ab Egg, Andreas Granata, and Hans Poser. Development and Integration of Renewable
Energy: Lessons Learned from Germany (FAA Financial Advisory AG). [EMR-16]
Explain how the rapid build-out of renewable energy resources in Germany has impacted the following areas:
Government spending
Grid reliability, grid interventions (rebalancing events), and backup power generation
Compare and assess feed-in taris with quota-based renewable obligation programs.
Explain the response of German PV solar installers to modications in the German feed-in tari program over time.
Identify the economic challenges associated with the use of feed-in tari programs.
Assess trends in German renewable capacity additions and penetration over a recent 20-year period.
Understand how observed domestic retail electricity prices are aected by the penetration of renewable energy
capacity on a countrys power grid.
18
Chris Groobey, john Pierce, Michael Faber and Greg Broome. Project Finance Primer for Renewable Energy and Clean
Tech Projects.* [EMR-17]
Describe project nance, and explain the structure of a typical project nance agreement; dierentiate between project
nance and merchant nance.
Understand the importance of power purchase agreements (PPAs) in securing project nance.
Dierentiate the characteristics of common loan structures used to nance renewable energy projects.
Understand the project waterfall as it relates to the distribution of revenues to stakeholders in a project nance
Describe key U.S. government incentive structures for renewable energy projects, including production tax credits
transaction.
(PTCs), investment tax credits (ITCs), and accelerated depreciation.
19
FINANCIAL
ENERGY
PRODUCTS
AND RISK
MANAGEMENT
Market mechanics
Storage costs
Arbitrage theory
Market mechanics
Basis swaps
Market Mechanics
Plain-vanilla options
Identify and describe the functions of commodity trading rms; explain how commodity trading rms can serve as
nancial intermediaries.
Explain how commodity trading rms facilitate transformation of commodities to add value to producers and consumers.
Identify the typical risk exposures that threaten the operation of commodity trading rms; understand how each type
of risk arises.
Understand the processes by commodity trading rms to manage various categories of risk, including at price risk,
basis risk, credit risk, liquidity risk, freight risk, and other categories of risks.
Summarize methods used to measure risk exposure, including the benets and drawbacks of VaR, the use of historical
and Monte Carlo simulation, and the estimation of extreme losses.
Describe trends in asset ownership by commodity trading rms and explain why commodity trading rms would own
midstream, downstream, and upstream assets.
Assess the potential impact of commodity trading rms on systemic market risk, including their potential to be a direct
source of systemic risk.
21
Compare and contrast the use of forward contracts and option strategies to hedge risk exposures; describe and
calculate the payo function and cash ows for each strategy.
Identify scenarios in which hedging activity adds value to a rm, and understand the reasons a rm might choose not
to hedge a risk exposure.
Understand and apply collar strategies, including zero-cost collars and pay-later strategies, to hedge risk exposures;
assess their payo functions.
Explain how rms engage in cross-hedging strategies to reduce risk exposures created by the price dierential
between two assets; construct a cross-hedge and calculate the proper hedge notional amounts.
Understand how the correlation between asset prices will impact the optimal hedge amount when implementing a
cross hedging strategy.
Compare and contrast forward and futures contracts and understand how they are applied.
Understand the mechanics of a futures position; assess the margin requirements and protability of an open futures
contract.
Identify circumstances that would require posting of additional margin (a margin call); quantify the margin
requirements for a specied period of time based on incremental MtM valuations.
Use a long or short futures position to hedge a commodity exposure or an obligation to buy or sell a commodity.
Describe the mechanics of swaps and explain the function of the swap counterparty, including swap dealers.
Use forward prices and interest rates to calculate a periodic swap settlement for a multiyear commodity swap.
Understand how the market value of a swap changes over time and describe factors that aect the market value of
Demonstrate how a swap represents an implicit lending agreement, use forward commodity prices and interest rates to
a swap.
derive a xed swap rate (swap price).
Understand the mechanics and payo proles of call and put options; identify when an option contract is in, at, or out
of the money.
22
Apply commodity concepts such as storage costs, carry markets, lease rate, and convenience yield.
Describe an arbitrage transaction in commodity forwards, and compute the potential arbitrage prot.
Dene the lease rate and explain how it determines the no-arbitrage values for commodity forwards and futures.
Dene carry markets, and illustrate the impact of storage costs and convenience yields on commodity forward prices
and no-arbitrage bounds.
Identify factors that impact electricity, natural gas, and oil forward prices.
Explain how basis risk can occur when hedging commodity price exposure.
Evaluate the dierences between a strip hedge and a stack hedge and explain how these dierences impact risk
management.
Provide examples of cross-hedging; assess the process of hedging jet fuel with crude oil and using weather derivatives.
Construct a synthetic commodity position, and use it to explain the relationship between the forward price and the
expected future spot price.
Calculate heating degree days (HDD) and cooling degree days (CDD); understand and assess the application of a
weather derivative to hedge weather related risk.
Describe the relationship between spot, forward and futures prices, and identify challenges related to price formation
of energy futures.
Dene a futures contract and contrast the mark-to-market value of forward versus futures positions.
Understand the characteristics of forward price curves including backwardation and contango; construct a forward
price curve.
Describe market frictions and imperfections that can impact price formation in a forward price curve.
Dene convenience yield and explain why the concept of convenience yield is often disregarded by market practitioners.
Compare theoretical and practical approaches to modeling the forward curve and provide advantages and disadvan-
Assess the sensitivity of commodity swaps to changes in interest rates and describe the use of the LIBOR curve in
tages of each.
commodity swaps.
Describe the mechanics of and calculate the settlement for the following types of swaps: physical, nancial, basis,
and Asian swaps.
Describe the payout function and calculate payouts on the following types of options: an Asian call and put, a call and
put on a spread option, and a binary (cash-or-nothing) option.
Understand the mechanics of and applications for volume-based options, including swing options and take-orpay options.
23
Describe characteristics of the US natural gas market, interpret the shape of and relationship between elasticity of
supply and demand curves, and identify market factors that explain these characteristics.
Understand the market mechanism that maintains balance between supply and demand in the short-term natural
gas market.
Summarize the factors that contribute to price volatility in the natural gas market, including the impact of traders
and speculators.
Explain how physical basis transactions aect natural gas price formation and price reporting.
Understand how regional natural gas price indices are developed and reported.
Structure and apply a xed-for-oating, a oating-for-oating, and a natural gas basis swap; calculate a swap
settlement for each.
Describe Exchange for Physicals (EFPs) transactions and understand their practical application.
Understand the application of and economic rationale for Volumetric Production Payments (VPPs); identify the risks
borne by buyers and sellers of VPPs.
Explain how natural gas processing plants can mitigate market risk through contracts that include xed-fee,
percentage of proceeds, percentage of index, and keep-whole provisions.
Identify and compare the application of structuring solutions for mitigating volumetric risk, including swing options,
swaps with embedded call options, weather derivatives and tari positions.
Describe the mechanics of a collar strategy, including costless collars, extendable collars, three-way collars, and
four-way collars.
Summarize the risks associated with using a costless collar strategy, particularly when transactions are backed by
collateral.
Construct and interpret a crack spread and identify potential risks that reneries face in using crack spreads as a hedge.
Explain the mechanics and application of a participating swap used to hedge a crude oil position.
Identify and understand the application of available indices and derivative contracts that shipping companies can use
to monitor and mitigate freight risk.
Understand the nancial limits and other obligations that a counterparty must meet to qualify for the end-user
exemption.
Understand and apply the de minimis threshold and major swap participant (MSP) test as they apply to counterparty
end-user qualication.
Summarize the reporting process under Dodd-Frank, and identify when a counterparty is obligated to report a transaction to a swap data repository (SDR).
Gordon Goodman. dodd-Franks impact on Financial Entities, Financial Activities and Treasury Aliates.* [FEP-09]
Understand and interpret the denition of a nancial entity under the Dodd-Frank Act; explain how this designation
aects mandatory clearing requirements.
24
Construct or identify scenarios in which the end-user exemption may be applied to organizations deemed nancial entities.
The Greeks
Backtesting VaR
Stress testing
Liquidity risk
Mean reversion
Jump diusion
VaR applications
Dene and dierentiate between conditional and unconditional probabilities, and calculate the conditional probability
using assumptions for a given scenario.
25
Apply and interpret the mean, standard deviation, and variance of a random variable.
Calculate and interpret the covariance and correlation between two random variables.
Describe the four central moments of a statistical variable or distribution: mean, variance, skewness and kurtosis.
Describe the properties of independent and identically distributed (i.i.d.) random variables.
Summarize and identify key properties of a uniform distribution, Bernoulli distribution, Binomial distribution, Poisson
distribution, normal distribution, lognormal distribution, Chi-squared distribution, and Students t distribution; illustrate
and assess practical applications of each.
Describe Bayes theorem and apply this theorem in the calculation of conditional probabilities.
Dene delta hedging and explain its application in the immunization of market risk associated with linear and nonlinear
nancial products.
Construct a delta hedge for an option contract or portfolio of options; assess and rebalance a delta hedge for a given
Dene gamma and explain the relationship between delta and gamma; construct a gamma hedge and a delta-gamma
Dene vega and construct a vega neutral position; calculate the quantity of options necessary to make a portfolio
gamma and vega neutral.
Dene theta and rho as they relate to individual options and option portfolios.
Explain how dynamic hedging of delta, gamma, vega, theta, and rho is typically done in practice.
Dene Value-at-Risk (VaR); identify the parameters for a VaR calculation, and describe the strengths and weaknesses
of using VaR.
Calculate VaR for a single position or a portfolio using dierent time horizons and condence levels.
Describe and calculate expected shortfall (ES); interpret the results from a VaR and ES calculation.
Summarize the four conditions required for a risk measure to be coherent; explain why VaR is not a coherent risk measure.
Estimate the marginal VaR, component VaR, and incremental VaR for a given position in a portfolio or for a potential
addition to a portfolio.
26
Explain the process of backtesting VaR and interpret results from backtesting a VaR model.
Describe and calculate the volatility of an asset return over various time periods.
Explain how the power law can be used to model fat-tailed return distributions, apply the power law to estimate the
probability of a variable exceeding a specied level.
Explain how the Exponentially Weighted Moving Average (EWMA) and the GARCH (1,1) model are used to forecast
volatility; understand the practical application of the two models and interpret results from each.
Kevin dowd. Measuring Market Risk, 2nd Edition (Hoboken, nj: john wiley & Sons, inc., 2005).
Chapter 13. Stress Testing [DMR-08]
Understand the benets of stress testing and identify situations in which stress tests are an eective assessment of risk.
Summarize the process of scenario analysis and identify guidelines for successful scenario analysis.
Develop practical scenarios and evaluate their potential impact on stress test results.
Compare and contrast mechanical stress testing techniques to the application of scenario analysis.
Understand how the bid-ask spread can be applied to measure market liquidity.
Calculate LVaR using the constant spread approach and the exogenous spread approach.
Explain the endogenous price approach to LVaR, its motivation and limitations.
Understand the relationship between liquidation strategies, transaction costs and market price impact.
Describe liquidity at risk (LaR) and identify the factors that aect future cash ows.
Identify weaknesses in using the Black-Scholes Merton model to replicate the behavior of energy commodity spot prices.
Understand why energy price jumps occur, describe the impact of jumps on spot price behavior, and explain how
jumps can be simulated.
Describe how seasonality is accounted for when estimating energy spot prices.
27
Estimate volatility for a given set of historical price data; understand how volatility is scaled for a specic time horizon.
Interpret a volatility smile, explain how it is derived and understand its relationship to implied volatility.
Identify weaknesses in using a Geometric Brownian Motion process to model energy prices.
Understand the relationship between the Simple Moving Average (SMA) and Exponentially Weighted Moving Average
(EWMA) methods for calculating VaR; identify advantages and disadvantages of each.
Understand how the decay factor aects output from an EWMA model; explain considerations for selecting the
decay factor.
Describe limitations in applying VaR as a risk management tool for energy assets.
Calculate VaR for a two-security energy portfolio given the correlation coecient between assets, explain the
relationship between correlation and VaR.
Dierentiate between delta VaR, delta-gamma VaR, historical simulations, and Monte Carlo simulations.
28
Expected loss
Probability of default
Netting agreements
Collateralization
Wrong-way risk
Country risk assessment
Fundamental Credit Assessment and Risk Exposure Learning Objectives
Betty Simkins and Russell Simkins, eds. Energy Finance and Economics: Analysis and Valuation, Risk Management, and
the Future of Energy.
Chapter 9. Financial Statement Analysis for Oil and Gas Companies and Competitive Benchmarking [CCP-01]
Understand the relationship between commonly used nancial statements including the balance sheet, income
statement, statement of cash ows, and statement of retained earnings.
Describe the process of competitive benchmarking and use this process to compare an energy companys nancial
ratios against those of similar competitors.
Calculate and interpret common metrics used to assess liquidity, debt coverage, protability and return on equity.
Calculate and interpret common metrics used to assess the value of hydrocarbon assets, reserves, and the eciency
of exploration and production activity.
Markus Burger, Bernhard Graeber, and Gero Schindlmayr. Managing Energy Risk: A Practical Guide for Risk Management
in Power, Gas, and Other Energy Markets (Hoboken, nj: john wiley & Sons, 2014).
Chapter 3.4 (Credit Risk section only). Risk Management [CCP-02]
Understand the relationship between settlement risk and replacement risk, calculate settlement and replacement risk
for an energy commodity transaction based on a given a set of assumptions.
Summarize and interpret external credit ratings and their related default probabilities.
Identify common quantitative internal rating factors, explain their application and how they dier 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.
29
Summarize the various levels of debt seniority including their respective security, collateral and priority.
Calculate and interpret the expected loss, loss given default, probability of default, and expected return for a credit
risk exposure.
Summarize credit assessment tools, including credit ratings, rating migration, internal ratings, and credit risk models.
Dene counterparty risk and dierentiate between counterparty risk and credit risk.
jon Gregory. Counterparty Credit Risk and Credit Value Adjustment: A Continuing Challenge for Global Financial
Markets, 2nd Edition (west Sussex, uK: john wiley & Sons, 2012).
Chapter 3. Dening Counterparty Credit Risk [CCP-04]
Identify transactions with counterparty risk and explain how counterparty risk is created in each transaction.
Dene credit exposure, credit migration, recovery, mark-to-market, replacement cost, default probability, loss given
default and the recovery rate.
Identify and describe the dierent tools available to manage or mitigate counterparty risk.
Counterparty Risk Mitigants: Netting, Collateral, Central Counterparty Clearing Learning Objectives
jon Gregory. Counterparty Credit Risk and Credit Value Adjustment: A Continuing Challenge for Global Financial Markets.
Chapter 4. Netting, Compression, Resets and Termination Features [CCP-05]
Dene netting and understand how it is used to reduce credit exposure under various scenarios.
Describe the mechanics of termination provisions and explain their advantages and disadvantages.
Dene walkaway features and identify the disadvantages in using walkaway features.
30
Describe the role of a valuation agent, the types of collateral that are typically used, and reconciliation of collateral
disputes.
Describe features of a credit support annex (CSA) as they relate to the ISDA master agreement and identify terms that
are typically included in a CSA.
Summarize and apply standard terms found in a collateralization agreement including: links to credit quality, margin and
Dierentiate between a two-way and one-way CSA agreement and describe how collateral parameters can be linked to
call frequency, thresholds, independent amount, minimum transfers, rounding, haircuts, interest, and rehypothecation.
credit quality.
Explain how market risk, operational risk, and liquidity risk (including funding liquidity risk) can arise through
collateralization.
Understand how a Central Counterparty (CCP) clears nancial transactions; describe the eect a CCP has on risk
allocation and its potential impact on systemic risk.
Describe how transactions are assessed and approved for clearing through a CCP.
Explain how a CCP manages default, particularly how netting is employed in such a circumstance.
Dierentiate between initial and variation margin; identify factors used by a CCP to calculate the initial margin
Explain how CCPs can create moral hazard among market participants.
Summarize the steps a CCP may take to replace or port a defaulted exposure.
Describe and interpret frequently used metrics to quantify credit exposure, including expected mark-to-market,
Compare the characterization of credit exposure to VaR methods and describe additional considerations used in the
expected exposure, potential future exposure, expected positive exposure, eective exposure, and maximum exposure.
determination of credit exposure.
Identify factors that aect the calculation of the credit exposure prole and summarize the impact of collateral on
exposure.
Identify typical credit exposure proles for swaps, options, and credit derivatives.
Explain how payment frequencies and exercise dates aect the exposure prole of various securities.
Explain the impact of netting on future exposure; Interpret the impact of correlation on netting and calculate the
netting factor.
Explain the impact of collateralization on exposure, and assess the risk associated with the remargining period.
Explain the dierence between risk-neutral and real-world parameters, and describe their use in assessing risk.
31
Chapter 10. Default Probability, Credit Spreads and Credit Derivatives [CCP-09]
Section 10.1 only
Calculate risk-neutral default probabilities, and compare the use of risk-neutral and real-world default probabilities in
pricing derivative contracts.
Describe the following approaches for estimating price: the historical data approach, equity based approach, and risk
neutral approach.
Explain the motivation for and the challenges related to pricing counterparty risk.
Dene Credit Value Adjustment (CVA) and describe how CVA is applied.
Explain how trades involving the following nancial products can introduce wrong-way risk: put options, commodity
swaps, and credit default swaps.
Identify the characteristics and guidelines that lead to an eective country risk analysis.
Identify key indicators used by rating agencies to analyze a countrys debt and political risk, and describe challenges
Summarize the factors that are likely to inuence the political stability and economic openness within a country.
Apply basic country risk analysis in comparing two countries as illustrated in the case study.
Explain key considerations when developing and applying analytical tools to assess country risk.
Describe a process for generating a ranking system and selecting risk management tools to compare the risk among
countries.
Identify and apply qualitative and quantitative factors that can be used to assess country risk.
Describe alternative measures and indices that can be useful in assessing country risk.
32
Heat maps and MARCI (Mitigate, Assure, Redeploy, and Cumulative Impact) charts
Compare and contrast the roles of risk appetite and risk tolerance and explain how an organization can align its risk
tolerance to its risk appetite.
Provide examples of considerations a rm must make in determining its risk appetite, and explain how an organizations
risk appetite can dier for various risk factors.
Describe eective strategies for how senior management can develop, communicate, monitor and update an organization's risk appetite.
Compare impact, likelihood, vulnerability, and speed of onset of potential risk events and explain how a scale can be
created to assess these four factors with respect to specic potential risk events.
Identify examples of actions a rm can take to reduce its vulnerability to specic risk events.
Compare and contrast qualitative and quantitative measurement techniques in assessing risks, and describe examples
of each.
Capture interactions between various risk factors using techniques such as risk interaction maps and the bow-tie
diagram.
Create a hierarchy of risks using heat maps and MARCI (Mitigate, Assure, Redeploy, and Cumulative Impact) charts to
aggregate, compare, and prioritize risks faced by a rm.
john Fraser and Betty Simkins. Enterprise Risk Management: Todays Leading Research and Best Practices for
Tomorrows Executives. (Hoboken, nj: john wiley & Sons, 2010).
Chapter 8. Identifying and Communicating Key Risk Indicators [ERM-03]
Provide examples of Key Risk Indicators (KRIs) and explain their application in risk management.
Compare and contrast KRIs and Key Performance Indicators; understand the role each plays within a risk management
strategy.
Describe the parameters for creating eective KRIs and how KRIs can then be aligned to support an organization's risk
management strategy.
Explain how KRIs are used to monitor risk exposures on an ongoing basis and how KRIs help to calibrate risk
management strategies.
Analyze the stakeholders, metrics and risk appetite inputs within an organization and explain how they are used to
Explain how adopting KRIs for risk management can be a challenge for an organization.
33
Demonstrate the ability to dierentiate between types of "good risk" and "reckless risk" for an organization.
Dene the concepts of risk tolerance and risk appetite and explain their eect on the risk management strategy of
an organization.
Identify and explain the key elements of an eective risk management strategy.
Explain the features of the Bowtie Model of risk assessment; explain its associated strategies and actions.
Robert Bea, ian Mitro, daniel Farber, Howard Foster and Karlene H. Roberts. A New Approach to Risk: The Implications
of E3. (Palgrave Macmillan 2009).* [ERM-05]
Discuss the factors used to assess risk within a complex organization or system.
Understand the interdisciplinary aspect of modeling risk associated with a complex system.
Provide an example of a Type Three Error (E3) and explain how mismanagement of this error can undermine a risk
management strategy.
Describe the elements used in a Complex Infrastructure System (CIS) risk assessment.
Explain why human error may be overlooked in risk assessment and why engineering analyses often underestimate the
probability of a system failure.
Explain the responsibility of each GARP member with respect to professional integrity, ethical conduct, conicts of
interest, condentiality of information and adherence to generally accepted practices in risk management.
34
REGISTER
FOR THE
EXAM
The rst step in obtaining your ERP designation is to register for the exam.
Registration for the ERP Program is available on the GARP website.
Details about the registration process and payment options are summarized in the following pages.
ERP
USD 300.00
Exam Fee
USD 450.00
USD 575.00
USD 750.00
Note: The ERP enrollment fee entitles you to a complimentary one year Individual Membership in GARP (a USD 195 value),
access to a wealth of premium risk content (Special Reports, CRO Interviews, webcasts), special pricing on GARP products,
programs and events, and many other benefits.
If you have any questions or encounter any diculties in registering, please contact memberservices@garp.com
for assistance.
36
Payment Options
deferral Policy
ERP candidates may defer their Exam registration to the
ing deferral is the last day of registration for the May and
following address.
not to attend the next Exam, you will forfeit your Exam
registration fee and will need to re-register as a return-
37
PREPARE
FOR THE
EXAM
The ERP curriculum is a self-study program that requires a considerable amount of time and focused preparation that culminates
in the ERP Exam. The ERP curriculum is quite comprehensive,
covering a wide range of topics with a signicant volume of supporting material.
Practice Exams
tween 200 to 400 hours of study time for the exam. The
personal circumstances.
readings.
39
Module Number
Module Name
Suggested Readings
MP 1-5
COM 1-6
NGC 4-8
EMR 4-8
EMR 12-17
FEP 1-4
FEP 6-9
10
DMR 1-4
11
DMR 5-9
12
13
CCP 3-7
14
CCP 8-13
15
ERM 1-6
40
Helpful Hints
possible.
time, you may leave the testing room but only after you
41
identication:
will not be allowed to sit for the exam. If you have any questions about the identication policy, please contact us
immediately at memberservices@garp.com.
Exam Center/Room Policies
not carried into the testing room. Please comply with all
graded.
earplugs
personal items
42
7:45 am
7:46 am
Once doors close, the exam is distributed and instructions are read.
8:00 am
Exam begins.
11:30 am
11:55 am
12:00 pm
1:45 pm
1:46 pm
Once doors close, the exam is distributed and instructions are read.
2:00 pm
Exam begins.
5:30 pm
5:55 pm
6:00 pm
43
AFTER
THE EXAM
Scoring of all exams takes approximately six (6) weeks to complete. There
are no penalties for incorrect answers; exam results are given as pass/fail.
The passing score for the exam is determined by the EOC.
ERP
Certied ERP
Risk Professional.
ERP Exam.
are sent via the United States Postal Service only. Delivery
Stating that all doctors are "PhDs" and all energy risk
address.
there is a USD 100 replacement fee. You can either fax your
45
name plates
GARP Events
GARP Events further the advancement of risk management and best practice by preparing risk professionals
If you have any questions about how to use the ERP desig-
memberservices@garp.com.
of risk management.
achievement.
The CPD program delivers a broad range of accessible
Maintaining GARP membership provides the candidate with
Requirements
and providers.
Chapter Meetings
advanced level.
46
Typical activities:
cycle will either open in the current calendar year or the fol-
MOOCs)
DIGITAL BADGE
Provides online verification of your certification and validates your participation in CPD
on professional and social networking pages like LinkedIn, Twitter, a blog or website
FRM|ERP DIRECTORY
Provides verification of your participation in the official directory of FRMs and ERPs,
including the date of your last completed cycle
ACKNOWLEDGEMENT OF COMPLETION
Provides printable proof of your achievement in meeting the standards set forth in the
CPD program
47
tion requirements.
only broadens your skill set, it demonstrates a standardized level of industry knowledge, making you a
ERP Exam?
A.
A.
management. However, the factors that drive price formation, volatility, and risk in physical energy commodity
ket practitioners to ensure that questions are unambiguous and clear to candidates regardless of where in the
A.
The passing score is determined by the EOC. Candidates will receive a pass/fail notication based on their
scores; numerical scores are not provided.
48
Creating a culture of
risk awareness
Global Association of
Risk Professionals
111 Town Square Place
14th Floor
Jersey City, New Jersey 07310
U.S.A.
+ 1 201.719.7210
2nd Floor
Bengal Wing
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U.K.
+ 44 (0) 20 7397 9630
www.garp.org
About GARP | The Global Association of Risk Professionals (GARP) is a not-for-prot global membership organization dedicated to
preparing professionals and organizations to make better informed risk decisions. Membership represents over 150,000 Members and
Aliates from banks, investment management rms, government agencies, academic institutions, and corporations from more than
195 countries and territories. GARP administers the Financial Risk Manager (FRM) and the Energy Risk Professional (ERP) Exams;
certications recognized by risk professionals worldwide. GARP also helps advance the role of risk management via comprehensive
professional education and training for professionals of all levels. www.garp.org.