Market Analysis & Financial Reporting Flashcards
7 cards from real ERAC practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 7 Market Analysis & Financial Reporting flashcards as text
Which financial metric best captures the volatility of energy commodity revenues over a rolling 12-month period?
Answer: Coefficient of variation of revenue
The coefficient of variation normalizes standard deviation by the mean, making it the most appropriate metric for comparing revenue volatility across different price scales.
In energy market financial reporting, a 'mark-to-market' valuation requires that derivative positions be recorded at:
Answer: Current fair market value
Mark-to-market (MTM) accounting records derivatives at their current fair market value on the balance sheet date, reflecting unrealized gains or losses.
A natural gas marketing company reports a sharp increase in 'unrealized trading gains.' What is the primary risk this signals to an energy risk auditor?
Answer: Potential overstatement of earnings before settlement
Large unrealized gains represent mark-to-market income that has not yet been cash-settled, creating earnings that may reverse if market prices move adversely.
Which of the following best describes 'basis risk' in an energy market context?
Answer: Divergence between the hedged price index and the actual price received
Basis risk arises when the price index used for hedging does not perfectly correlate with the actual physical price at the delivery location or time.
Under ASC 815, which condition must be met for a commodity derivative to qualify for hedge accounting treatment?
Answer: The hedge must be formally designated and documented at inception
ASC 815 requires formal designation and documentation of the hedging relationship at inception, including identification of the risk being hedged and the hedging instrument.
An energy company's financial report shows a consistently high 'days sales outstanding' (DSO). What operational risk does this most directly indicate?
Answer: Potential liquidity pressure from delayed customer payments
High DSO means customers are taking longer to pay, which reduces cash availability and may signal credit quality issues within the customer base.
In power market analysis, the 'spark spread' is used to measure:
Answer: Profitability of converting natural gas into electricity
The spark spread equals the electricity price minus the cost of the natural gas needed to generate that electricity, indicating the gross margin for a gas-fired power plant.