FINANCIAL RISK MANAGEMENT

& ESG / GREEN FINANCE

Comprehensive Study Notes | MBA Finance | MANIT Bhopal

History of Economics • Types of Financial Risk

Risk Measurement: Qualitative & Quantitative Approaches
ESG Framework & BRSR • Credit Ratings in India
Green Finance • International Finance • Derivatives

Quick Revision | Diagrams | Real-World Examples | All Formulas

 ① PART 1: INTRODUCTION TO FINANCIAL RISK MANAGEMENT

1.1 History of Economic Thought

School Period Key Ideas Key Thinkers

Exports > Imports; Accumulate gold/silver; Colonies & Thomas Mun, Jean-Baptiste
Mercantilists 16th–18th C
trade surplus Colbert

~1750 Agriculture = source of wealth; Laissez-faire; No govt Francois Quesnay, Turgot,

Physiocracy
France intervention Gournay

Supply creates demand (Say's Law); Free market; Full Adam Smith, David Ricardo,
Classical School 1750–1850
employment; Gold standard J.S. Mill

Marginal utility; Marginal productivity theory; Price Jevons, Walras, Menger,

Neo-Classical 1870s+
mechanism clears markets Alfred Marshall

Demand creates supply; Govt intervention needed;

Keynesian 1930s+ J.M. Keynes (1936)
Budget deficit; Short-run focus

Monetarism, Game Theory, Supply-side economics, Friedman, Samuelson,

Post-Keynesian 1970s+
New Classical & New Keynesian Sraffa

KEY CONTRAST: Classical vs Keynesian

Classical: Laissez-faire, supply creates demand, full employment, wage-price flexibility
Keynesian: Govt needed, demand creates supply, wage rigidity, short-run, budget deficits
Great Depression (1930s) → Keynes challenged Classical. Oil Shock (1970s) → Post-Keynesian rise.

1.2 What is Financial Risk Management?

Financial Risk Management is a method of managing and safeguarding any entity's economic value by employing risk
mitigation approaches to manage exposure to financial risks including operational risk, credit risk, interest rate risk, and
others.

Concept Definition

Situation where outcomes AND their probabilities are KNOWN to the decision-maker. Linked to
Risk
uncertainty and randomness.

Uncertainty Situation where outcome probabilities are NOT known. Cannot be precisely measured.

Black Swan Unpredictable, unprecedented financial shocks — rare but high-impact. Concept by Nassim Taleb.

Formalised by Kolmogorov (1933): Model = triplet (Ω, F, P) — sample space, events, probability
Randomness
measure.

1.3 Types of Financial Risk

1 MARKET RISK 2 CREDIT RISK 3 LIQUIDITY RISK

Losses from changes in market prices — Counterparty fails to meet financial Unable to meet short-term obligations or
stocks, interest rates, FX, commodities. obligations — default, concentration, sell assets without heavy price cuts.
Examples: sovereign. loss
Bond loss due to rate hike; Rupee depreciation Examples: Yes Bank run 2020; NBFC liquidity crisis
Examples: Borrower defaults; IL&FS debt crisis 2018

4 OPERATIONAL RISK 5 LEGAL/REGULATORY RISK 6 STRATEGIC RISK

Losses from failed processes, systems, Non-compliance penalties, law changes, Bad business decisions, failure to adapt,
human error, fraud, cybercrime. contract disputes, litigation. M&A failures, competition.
Examples: PNB fraud (Nirav Modi); System outages
Examples: SEBI penalties; RBI compliance finesExamples: Kodak ignored digital; Nokia missed smartphone
 7 REPUTATIONAL RISK 8 SYSTEMIC RISK 9 MODEL RISK
Damage to brand/credibility from One institution's failure triggers Faulty assumptions, bad data, or misused
scandals, governance failures, widespread financial collapse — financial models lead to wrong decisions.
controversies. contagion. Examples: LTCM collapse 1998 due to model failure
Examples: Satyam Scam 2009; social media controversies
Examples: Lehman Brothers 2008; Global Financial Crisis

② PART 2: MEASUREMENT OF RISKS

2.1 Two Approaches to Risk Measurement

Dimension QUALITATIVE QUANTITATIVE

Basis Expert judgment, descriptive Statistical models, numerical data

Best for Emerging risks, strategic & reputational risks Market, credit, liquidity risks

VaR, ES/CVaR, Volatility Models, Monte

Tools Heat Maps, Delphi Method, Scenario Analysis
Carlo

Objective; comparable; regulatory

Strengths Captures intangible risks; fast; flexible
acceptance

Depends on past data; model risk; misses

Limitations Subjective; hard to compare; not precise
extremes

Key Rule Use for 'context' and emerging threats Use for 'precision' and regulatory compliance

■ Best Practice: Use BOTH together — qualitative for identifying & contextualising, quantitative for measuring &
reporting.

2.2 Qualitative Techniques

A. Risk Heat Map

A visual tool that plots risks by Likelihood (x-axis) vs Impact (y-axis). Color-coded cells help prioritise which risks need
immediate attention.

RISK HEAT MAP

LEGEND:
Low Risk
Critical 1,5 2,5 3,5 4,5 5,5
Medium Risk
High Risk
Major 1,4 2,4 3,4 4,4 Critical 5,4
IMPACT →

Moderate 1,3 2,3 3,3 4,3 5,3

Minor 1,2 2,2 3,2 4,2 5,2

Negligible 1,1 2,1 3,1 4,1 5,1

Rare Unlikely Possible Likely Almost

LIKELIHOOD →

Step Action

1. Identify List all potential risks: operational, financial, strategic, compliance, reputational

2. Score Assign Likelihood (1–5) and Impact (1–5) to each risk

3. Plot Place each risk in the corresponding matrix cell

4. Colour-code Green = low risk | Yellow = medium | Red = high | Dark Red = critical
 Step Action

5. Prioritise Focus mitigation resources on top-right (high likelihood + high impact) first

B. Delphi Method
A structured expert-consensus technique. A panel of experts answer questionnaires in multiple anonymous rounds.
Feedback is shared between rounds until consensus is reached.

Round Process Output

Round 1 Experts independently respond to open questionnaire Initial opinions collected

Round 2 Anonymised summary shared; experts revise views Narrowed range of opinions

Round 3+ Repeat until consensus emerges Final agreed risk assessment

DELPHI METHOD — KEY POINTS

Advantage: Reduces groupthink through anonymity; harnesses collective intelligence
Useful for: Predicting future risks not yet captured in historical data
Example: Central banks use Delphi-style expert panels to anticipate systemic risks

C. Scenario Analysis
Considers potential risks that may NOT have occurred yet but could significantly impact the organisation in the future.
Unlike pure historical analysis, it uses hypothetical 'what-if' scenarios.

Scenario Type Description Example

Base Case Most likely outcome under normal conditions GDP grows 6%, inflation at 5%

Optimistic assumptions — things go better than

Best Case Exports boom, rupee strengthens
expected

Worst Case Pessimistic — adverse events occur simultaneously Oil at $150, INR at 95, rate hike 200bps

2008-style crisis replicated on current

Stress Test Extreme scenario to test resilience of the portfolio
portfolio

2.3 Quantitative Techniques

A. Value at Risk (VaR)

VaR estimates the MAXIMUM EXPECTED LOSS of a portfolio over a specific time horizon at a given confidence level.
It answers: 'How much could we lose in the worst X% of cases?'

VaR vs Expected Shortfall (ES)

VaR (95%)
ES/CVaR

Tail Risk

VaR = Maximum loss at confidence level | ES = Average loss BEYOND VaR (captures tail risk)

Method How it works Pros / Cons

Use actual past returns to simulate potential losses.

✓ Simple, no distribution assumption ✗
Historical Simulation Sort all historical daily losses; find the cut-off at
Assumes past = future
confidence level.
 Method How it works Pros / Cons

Parametric
Assume normal distribution. VaR = Portfolio Value × ✓ Fast, mathematically elegant ✗ Fails for
(Variance-
Z-score × Volatility (σ) fat-tail distributions
Covariance)

Monte Carlo Simulate thousands of random scenarios using ✓ Handles complexity & non-linearity ✗
Simulation statistical distributions. Find 5th percentile loss. Computationally heavy; model-dependent

VaR (Parametric): VaR = Portfolio Value × Z-score × σ × √T

Example: ■100Cr portfolio, σ=2%, 95% confidence (Z=1.645), 1-day → VaR = 100 × 1.645 × 0.02 = ■3.29 Cr

VaR Shortcoming Why it matters

Ignores tail risk Tells you the cut-off loss, NOT how bad things can get BEYOND that cut-off

Assumes normal dist. Real markets have fat tails — extreme events are more frequent than normal dist predicts

Not sub-additive VaR of combined portfolio can be > sum of individual VaRs — violates diversification logic

Historical data bias Fails to capture unprecedented 'Black Swan' events like COVID-19 or 2008 crisis

B. Expected Shortfall (ES) / Conditional VaR (CVaR)

ES measures the AVERAGE LOSS in scenarios BEYOND the VaR threshold. If VaR at 95% = ■3.29 Cr, ES tells you
the average loss in the worst 5% of days. Required under Basel III for banks.

ES (CVaR): ES = Average of all losses that exceed VaR

Advantage: Sub-additive (respects diversification), captures tail risk, Basel III compliant
Example: If worst 5% of days show losses of ■4Cr, ■5Cr, ■6Cr → ES = (4+5+6)/3 = ■5 Cr

C. Volatility Models
Volatility = standard deviation of returns = measure of risk. Higher volatility = more uncertainty.

Model Description Use Case

σ calculated from past returns using standard deviation

Historical Volatility Baseline risk assessment
formula

Exponentially Weighted Moving Average — gives more

EWMA When recent events matter more
weight to recent data

Generalized Autoregressive Conditional

GARCH Options pricing, risk forecasting
Heteroskedasticity — models volatility clustering

Extracted from option prices — market's forward-looking

Implied Volatility India VIX index (NSE)
fear gauge

D. Machine Learning in Risk Analysis

ML Technique Risk Application

Random Forest / XGBoost Credit scoring, default prediction — better than traditional logistic regression

Neural Networks (LSTM) Time-series forecasting of stock prices, volatility, and macro variables

NLP (Sentiment Analysis) Analyse news/social media to detect reputational or market risk early

Anomaly Detection Detect fraud, cybersecurity threats, unusual trading patterns in real-time

2.4 Enterprise Risk Framework

Stage Tools Used Output

① IDENTIFY Risk registers, Delphi method, Scenario analysis Comprehensive risk inventory

② MEASURE VaR, ES/CVaR, Volatility models, Stress testing Quantified risk exposure

③ MONITOR Dashboards, Key Risk Indicators (KRIs), Heat maps Real-time risk tracking
 Stage Tools Used Output

④ REPORT Regulatory filings, Board reports, Basel/RBI disclosures Compliance & transparency

2.5 Numerical Problems: Variance, Standard Deviation & CV

Problem 1: Stock Risk Comparison

Two stocks (A and B) have the following annual returns (%):

Year Stock A Stock B

1 10 5

2 12 15

3 8 -2

4 11 20

5 9 -3

Mean A: = (10+12+8+11+9)/5 = 50/5 = 10%

Mean B: = (5+15+(-2)+20+(-3))/5 = 35/5 = 7%
Variance A: = Sum[(xi - mean)²]/(n-1) = (0+4+4+1+1)/4 = 10/4 = 2.5
Std Dev A: σ = √2.5 = 1.58%
Variance B: = (4+64+81+169+100)/4 = 418/4 = 104.5
Std Dev B: σ = √104.5 = 10.22%
Conclusion: Stock B is RISKIER (σ = 10.22% vs 1.58%). Much higher volatility.

Problem 2: Coefficient of Variation (CV)

CV = Standard Deviation / Mean Return × 100. It measures risk per unit of return. HIGHER CV = MORE RISK relative
to returns.

Stock X: Mean = 12%, σ = 6% → CV = 6/12 × 100 = 50%

Stock Y: Mean = 8%, σ = 5% → CV = 5/8 × 100 = 62.5%
Conclusion: Stock Y is RISKIER by CV (62.5% > 50%) despite lower absolute std deviation
Use CV when: Comparing stocks with DIFFERENT mean returns — normalises risk per unit return

③ PART 3: ESG — ENVIRONMENTAL, SOCIAL & GOVERNANCE

E S G
ENVIRONMENTAL SOCIAL GOVERNANCE

• Climate Change • Labour Rights • Board Diversity

• Emissions • Diversity • Executive Pay
• Water Use • Health & Safety • Anti-Corruption
• Biodiversity • Community • Transparency
• Green Energy • Supply Chain • Shareholder Rights

3.1 What is ESG?

ESG is a third-party measurement framework providing a QUANTITATIVE assessment of a company's sustainability. It
evaluates an organisation's impact on the social and natural environment, and its governance quality.

ORIGIN
Concept introduced by the United Nations in 'Who Cares Wins' Global Compact Report (2004)
ESG requires companies to implement environmental, social, and governance principles
Source: S&P Global Ratings (2021) — 3 dimensions of sustainability in corporate affairs
3.2 India-Specific: SEBI's BRSR Mandate

Item Details

Full Form Business Responsibility & Sustainability Report (BRSR)

Mandatory for Top 1000 listed companies by market cap (w.e.f. FY 2022-23)

Voluntary for All other listed companies outside top 1000

Regulator SEBI (Securities and Exchange Board of India)

Standardised ESG disclosure format; enables investors to compare companies on

Purpose
sustainability

Indian Example L&T; raised ■500 Cr through India's first listed ESG bond under new SEBI norms (2025)

3.3 ESG Pillar Details (Refinitiv Framework)

Pillar Sub-Dimensions Key Metrics

CO2 emissions, energy consumption, water

■ Environmental Emissions, Resource Use, Innovation, Biodiversity
intensity, green revenue %

Workforce, Human Rights, Community, Product Employee turnover, diversity ratios, CSR
■ Social
Responsibility spend, safety incidents

Board independence %, women on board,

■■ Governance Management, Shareholders, CSR Strategy
audit quality, anti-bribery policies

④ PART 4: GREEN FINANCE & INTERNATIONAL FINANCE

4.1 Green Finance Instruments

GREEN SLB MASALA CARBON BLENDED

BOND BOND CREDITS FINANCE
Coupon rises if
Funds green ESG target missed INR bond sold Earn by cutting Govt absorbs
projects only overseas emissions first-loss

Instrument What it is Indian Example

Funds ONLY green projects. Third-party verified.

Green Bond NTPC $450M Green Bond at 2.75%
Proceeds tracked for green use.

SLB (Sustainability- ANY use of proceeds, but coupon RISES if ESG

Adani Ports $750M SLB
Linked Bond) targets are missed. KPI-linked.

INR-denominated bond sold overseas. FOREIGN

Masala Bond HDFC, NTPC Masala Bonds
investor bears FX risk (not issuer).

Bank loan specifically for green/climate assets.

Green Loan SBI loan to Greenko solar
Proceeds tracked.

Earn credits by cutting emissions below baseline; sell Rajasthan wind farm → Tata Steel buys
Carbon Credits
credits to polluters. credits

Government absorbs first-loss risk; private capital

Blended Finance Govt grant + Green bond combo
follows at lower risk.

4.2 Key Green Finance Formulas

 Greenium: = Yield(Normal Bond) - Yield(Green Bond)
NTPC Example: = 3.05% - 2.75% = 0.30% (30 bps) → NTPC saves $1.35M/year on $450M bond
Green Allocation %: = Amount Used for Green Projects / Total Bond Proceeds × 100 [Must be > 95%]
Carbon Intensity: = CO2 Emissions (tCO2e) / Revenue [KPI in SLBs — lower = better]

GREENIUM INSIGHT
Greenium = the 'green premium' — issuers pay LESS interest on green bonds than regular bonds
Why? ESG-focused investors accept lower yield in exchange for green certification
If Green Allocation % < 95%, bond may be 'greenwashing' — not genuinely green

4.3 Original Sin Hypothesis

Proposed by Eichengreen & Hausmann (1999): Developing countries CANNOT borrow internationally in their own
currency. They are forced to borrow in USD/EUR — a structural curse creating currency mismatch.

Original Sin Index (OSI) Scale

INDIA = 0.8

0 0.5 0.8 1.0

No Sin Moderate India Full Sin
(USA,EU)

OSI Formula: OSI = 1 - (Own-currency bonds issued / Total bonds issued)

OSI = 0: No sin (USA, Germany — borrow in own currency)
OSI = 1: Full sin (most emerging market countries)
India Example: $10B bonds issued, only $2B in INR (Masala Bonds) → OSI = 1 - (2/10) = 0.8 → HIGH sin
Solution: More Masala Bonds = shifts FX risk to foreign investor = LOWER OSI

REAL-WORLD EXAMPLE: Asian Crisis 1997

Asian Crisis 1997: Thai/Korean firms borrowed in USD (couldn't borrow locally)
When USD strengthened 50%+, firms couldn't repay → mass defaults → banking collapse
Classic Original Sin disaster — textbook example for exams!

Consequence What Happens

Currency Mismatch Earn INR, repay USD → FX risk permanently baked into debt

Amplifies Crises When EM currencies crash, ALL USD-debt holders suffer simultaneously

Limits RBI Policy Can't cut interest rates freely — risks capital flight and rupee depreciation

Pro-cyclical Flows Capital rushes IN during boom, rushes OUT in bust — amplifying economic swings

4.4 Currency Mismatch

Assets/revenues in one currency, liabilities in another. When exchange rate moves, balance sheet gets hit.

Scenario Risk Level Example

■ NO MISMATCH
Earn USD, Owe USD Infosys, TCS — earn $25B+ in USD, borrow in USD. Safe.
(Natural Hedge)

■■ DANGEROUS Hotel in Mumbai with USD lease; Jet Airways (paid USD leases,
Earn INR, Owe USD
MISMATCH earned INR)

Earn INR, Owe INR ■ NO MISMATCH Domestic firm, domestic loan — fully matched
 Currency Mismatch Ratio: = FX Liabilities / FX Assets [>1 = exposed | <1 = naturally hedged]
Tata Motors Example: USD debt $3.5B, JLR USD revenue $4.2B → ratio = 3.5/4.2 = 0.83 → Hedged ✓
Hedging Ratio: = Hedged FX Exposure / Total FX Exposure × 100% [100% = fully safe]
FX Loss (unhedged): Extra Rupee Cost = Unhedged USD Debt × Depreciation% × Spot Rate
Numeric Example: $40M unhedged, INR falls 5% from ■83 → Loss = 40M × 0.05 × 83 = ■166 Cr!

CASE STUDIES: CURRENCY MISMATCH DISASTERS

Jet Airways Case: Earned INR (domestic), paid USD (aircraft leases + fuel)
INR fell ■63 → ■74 in 2018 → USD costs ballooned in rupee terms → losses → collapse 2019
Vedanta: Borrowed billions in USD for Indian (INR revenue) operations → INR ■70 → ■83+ → debt distress 2023

4.5 Foreign Currency Borrowings (FCB) — Indian Firms

Indian firms borrow in USD (via ECBs — External Commercial Borrowings, regulated by RBI) for: (1) lower USD
interest rates, (2) longer tenure, (3) larger ticket size.

Why it looks attractive: INR bond yield: 8.5% | USD rate (SOFR + spread): 5.5% | Apparent saving: 3.0%
The catch (hedging cost): Forward premium (cost to hedge INR/USD): ~2.5%
Net saving if HEDGED: 3.0% - 2.5% = only 0.5% saving (small but real)
Risk if NOT hedged: If INR depreciates 5% → net LOSS of ~2% despite lower USD rate!
Net FCB Cost formula: = USD Rate + Spread + Forward Premium [compare with INR rate]

Behaviour Pattern Detail

Large firms only Only large export/FDI-linked firms access ECBs. SMEs practically excluded.

Low hedging rate Only 30-40% of firms fully hedge. Rest are exposed to INR movements.

Natural hedgers safe IT exporters (TCS, Infosys) earn USD + borrow USD → no mismatch. Safe.

Import firms vulnerable Earn INR, pay USD for imports + debt → double exposure to FX risk.

TCS Smart Move $1B bond at 1.75% USD vs 7%+ INR rate. Earns $25B+ in USD → natural hedge.

DSCR Stress Test: = EBITDA / (Interest + Principal Repayment) [>1.5x = safe]

⑤ PART 5: CREDIT RATINGS IN INDIA

5.1 What is a Credit Rating?

A credit rating is an independent, third-party assessment of the creditworthiness of a borrower (company, bank,
government) or a specific debt instrument. It signals the probability of default.

Rating Category CRISIL ICRA CARE Meaning

Highest Safety AAA AAA AAA Lowest risk; strongest capacity to repay

High Safety AA AA AA Very low risk with minor differences

Low risk but susceptible to adverse

Adequate Safety A A A
conditions

Moderate Safety BBB BBB BBB Moderate risk; lowest investment grade

Moderate Risk BB BB BB Speculative grade; elevated default risk

High Risk B B B High risk; ability to repay is uncertain

Very High Risk C C C In or near default; very speculative

Default D D D Already in default on obligations

 KEY RULE
Investment Grade: BBB and above — banks, mutual funds, insurance companies can invest
Speculative/Junk Grade: BB and below — higher yield demanded, higher default risk
India's Credit Rating Agencies: CRISIL (S&P affiliate), ICRA (Moody's affiliate), CARE, India Ratings (Fitch affiliate), Brickwork Ratings

5.2 Rating Process & Key Factors

Factor What analysts look at

Business Risk Industry outlook, market position, competitive advantages, product diversification

Financial Risk Debt/Equity ratio, DSCR, interest coverage, cash flows, profitability

Management Quality Track record, corporate governance, succession planning, strategy clarity

Liquidity Current ratio, cash reserves, access to bank lines, debt maturity profile

Macroeconomic GDP growth, inflation, interest rate environment, regulatory changes

Sovereign Factor Company rating cannot exceed country sovereign rating (India = BBB- by S&P;)

INDIA CASE STUDIES: RATING FAILURES

IL&FS Crisis 2018: Rated AAA just months before defaulting → massive credibility blow to Indian CRAs
DHFL (2019): Downgraded from AA to D within months → exposed CRA surveillance gaps
Lesson: Ratings are point-in-time opinions, NOT guarantees. Always look at rating trends (watch/negative outlook).

⑥ PART 6: RISK MITIGATION USING FINANCIAL DERIVATIVES

6.1 What are Derivatives?

A derivative is a financial contract whose VALUE is DERIVED from the performance of an underlying asset (stocks,
bonds, currencies, commodities, interest rates). Used for: (1) Hedging risk, (2) Speculation, (3) Arbitrage.

Derivative What it is Used to hedge Indian Example

Custom OTC agreement to buy/sell at

FX risk (importers/exporters Tata importing steel: buys USD
Forward Contract a fixed price on a future date. Not
locking exchange rate) forward at ■83 to lock rate
traded on exchange.

Standardised, exchange-traded
Commodity price risk, equity MCX Gold futures; NSE Nifty
Futures Contract contract. Marked-to-market daily.
portfolio risk 50 futures
Margin required.

Portfolio protection; hedging

Right (NOT obligation) to buy (Call) or NSE Nifty options; stock
Options downside while keeping
sell (Put) at strike price by expiry. options on BSE
upside

Exchange of cash flows: Interest Rate

Interest rate risk; HDFC Bank: pay fixed 6%,
Swaps Swap (fixed for floating) or Currency
cross-currency borrowing risk receive LIBOR/SOFR floating
Swap.

6.2 Options Basics

Type Right to Exercise when Risk profile

Buyer: Limited loss (premium) | Unlimited

BUY the asset at strike Market price > Strike price (In the
Call Option gain Seller: Limited gain (premium) |
price Money)
Unlimited loss

SELL the asset at strike Market price < Strike price (In the Buyer: Limited loss (premium) | High gain
Put Option
price Money) Seller: Limited gain | High potential loss

Call Option Payoff: Max(S - K, 0) - Premium [where S = spot price, K = strike price]
Put Option Payoff: Max(K - S, 0) - Premium
Hedging Example: Exporter fears INR appreciation → Buy USD Put Option (right to sell USD at ■83)
Importer hedges: Fears INR depreciation → Buy USD Call Option (right to buy USD at ■83)
 6.3 Interest Rate Swap — Hedging Example
A company with a floating-rate loan fears interest rates will RISE. It enters an Interest Rate Swap: pays FIXED rate,
receives FLOATING rate. Net effect: converts floating exposure to fixed — removes uncertainty.

Party Pays Receives Net Effect

Company A SOFR+2% from swap

Fixed 7% to bank Locked fixed cost — no rate risk
(hedger) counterparty

Company B (swap
Floating SOFR+2% Fixed 7% from Company A Benefits if rates fall below 7%
party)

★ QUICK REVISION — ALL FORMULAS & KEY FACTS AT A GLANCE

Topic Formula / Key Point Remember

Standard Deviation σ = √[Σ(xi - x■)² / (n-1)] Higher σ = more risk

Coefficient of Variation CV = (σ / Mean) × 100 Higher CV = riskier relative to return

VaR (Parametric) VaR = Portfolio Value × Z-score × σ × √T 95% → Z=1.645 | 99% → Z=2.326

Expected Shortfall
ES = Average of all losses exceeding VaR ES > VaR always | Basel III uses ES
(ES)

Greenium Yield(Normal) - Yield(Green Bond) Positive = green bond cheaper for issuer

Green Allocation % Green Project Amount / Total Proceeds × 100 Must be > 95% to avoid greenwashing

Carbon Intensity CO2 Emissions / Revenue Lower = better | SLB KPI

Original Sin Index OSI = 1 - (Own-CCY bonds / Total bonds) 0 = no sin | 1 = full sin | India ≈ 0.8

Currency Mismatch
FX Liabilities / FX Assets >1 = exposed | <1 = naturally hedged
Ratio

Hedging Ratio Hedged $ / Total $ Exposure × 100% 100% = fully safe | 0% = fully exposed

FX Loss (Unhedged) Unhedged USD Debt × Depreciation% × Spot Rate In rupees — extra cost from INR fall

Net FCB Cost USD Rate + Spread + Forward Premium Compare vs INR rate to find true saving

DSCR EBITDA / (Interest + Principal) >1.5x = safe | <1x = distress zone

Call Option Payoff Max(S - K, 0) - Premium In the money when S > K

Put Option Payoff Max(K - S, 0) - Premium In the money when K > S

MEMORY AIDS — One-Liners to Remember

Topic One-liner Memory Aid

Keynesian vs Classical Classical = market heals itself. Keynesian = market needs a doctor (govt).

VaR vs ES VaR = fence. ES = how deep is the pit beyond the fence.

You earn rupees, owe dollars. Dollar rises → you suffer more (you didn't spend more, just rate
Original Sin
changed).

Masala Bond Indian spice served abroad — rupee bond sold to foreign investors. THEY take FX risk, not us.

Greenium Green bond = discount for being eco-friendly. Issuer pays lower interest.

BRSR SEBI's report card on ESG — mandatory for top 1000 companies from FY23.

Heat Map Top-right = panic zone. Bottom-left = relax zone. Color tells the story.

Delphi Anonymous experts, multiple rounds, reach consensus. Like a secret committee vote.

Currency Mismatch Match your income currency with your debt currency. Jet Airways didn't. They collapsed.

Forward Contract Lock tomorrow's price today. No flexibility, but full protection.
 Topic One-liner Memory Aid

Option Insurance policy for investors. You pay premium, you get right but not obligation.

Credit Rating AAA Safest borrower. Below BBB = junk = banks can't invest. D = already defaulted.

OSI India = 0.8 India is 80% sinful on Original Sin scale. Solution: issue more Masala Bonds.

EXAM CHECKLIST — What to Know Before the Exam

■ History: Classical = Say's Law + full employment | Keynesian = demand, deficit, short-run

■ 9 Types of risk + one real example for each (market, credit, liquidity, operational, legal, strategic, reputational, systemic, model)

■ Heat Map: 5×5 grid, colour zones, 5 steps to create it

■ VaR: 3 methods (historical, parametric, Monte Carlo) + formula + 3 shortcomings

■ ES (CVaR): average loss beyond VaR, Basel III required, better than VaR for tail risk

■ Numerical: Calculate mean, variance, std deviation, CV for stocks — know which is riskier

■ ESG = UN 2004, SEBI BRSR mandatory top 1000 from FY23, 3 pillars E/S/G

■ Green Finance: 5 instruments + Greenium formula + NTPC example

■ Original Sin: OSI formula + India = 0.8 + Asian Crisis 1997 + Masala Bond solution

■ Currency Mismatch: formula + Jet Airways case + Tata Motors (hedged) case

■ FCB: Net cost = USD rate + spread + forward premium. Fully hedge or face FX loss.

■ Credit Ratings: AAA to D scale, 3 Indian CRAs, IL&FS; failure case, investment grade = BBB+

■ Derivatives: 4 types (Forward, Futures, Options, Swaps) + Call/Put payoff formulas

MBA Finance | MANIT Bhopal | Financial Risk Management & ESG / Green Finance
Prepared from: Lec 1 Intro to FRM | ESG Lecture 1 | Measurement of Risks | Green Finance Notes
Credit Ratings in India | Risk Mitigation using Financial Derivatives | Numerical Question Set