ManagementofExchangeraterisk

2016

Sudiksha Joshi

Summer Intern, IRFC

6/10/2016

Foreign Exchange Rate Risk Management of IRFC


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Exchange Rate Risk Management of IRFC

BACKGROUND OF IRFC:

The Indian Railway Finance Corporation is at the forefront of financial companies in India that raises

funds from the capital market at competitive costs to enhance plans of the Railways, and ensure that the

Corporation earns optimum profits from its operations. It mobilizes resources through market borrowings

from both domestic and overseas capital markets, and uses innovative and wide array of instruments to

plummet the cost of borrowing.

Its cumulative funding to the Rail sector crossed Rs 1.25 lakh crore and it has consistently met the

borrowing targets that the MOR assigns, and timely pays the debts. Consequently, the Department of

Public Enterprises has rated “Excellent” to IRFC. Besides that, it has the highest rating from the credit

rating agencies for its long and short term borrowing programmes. International agency called S&P’s has

awarded IRFC BBB-(Stable).

IRFC’s main responsibility is to manage and mitigate credit risk, although it doesn’t really exist.

Nevertheless, it has placed adequate multiple tier control systems internally that commensurate with the

nature and volume of business. The Internal Auditors periodically assess this. Professional and reputed

firm of Chartered Accountants engaged as Retainers of Accountants maintain the accounts efficiently.

IRFC has a single client- Ministry of Railways. It grows annually at the rate of 20-25% over a sustained

period of time. It has a Lease Agreement with MOR each year that carefully matches the interest rate

sensitivity profile of its assets and liabilities.

Foreign currencies borrowed with more than 5 years of maturity date have either bullet or amortized

payments in half yearly instalments. This significantly mitigates the risk. IRFC hedges very selectively in a

need based fashion, accounting the high hedging costs prevailing with longer debt dated debt.


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Risk management

It refers to identifying, assessing and prioritizing risks, then using economical and coordinated use of the

resources to monitor, minimize and mitigate the chance and intensity of uneventful events circumscribing

it.

Below are the guidelines for implementing risk management process:

1. Identifying risk in a selected domain of occurrence

2. Mapping out the following:

● the social scope of risk management

● the identity and objectives of stakeholders

● the basis upon which risks will be evaluated, constraints.

3. Analysis of risks involved in the processes

4. Mitigation risks and developing solution using available technological, human and

organizational resources.

Risk Assessment

IRFC must assess risks to quantify the gravity of the situation, which in most cases, has negative

implications, and must evaluate the probability of occurrence. After assessing, it must intuitively make the

best judgement to compute a reasonably sound and risk averse/neutral management plan.

Risk identification predates risk assessment. Risk Identification tells defines the risk circumscribing the

problem, while risk assessment tells us how the risk will affect IRFC’s objective. The tools and techniques

used to identify risk and assess risks are different. After a risk has been identified, it needs to be

assessed both qualitatively and quantitatively. Risk assessment is when IRFC gauges the consequence

of the risk.

The following are the risk mitigation measures:

1. Design a new business process with adequate built-in risk control and containment

measures from the start.

2. Periodically re-assess risks that are accepted in ongoing processes as a normal feature

of business operations and modify mitigation measures.

3. Transfer risks to an external agency (e.g. an insurance company)

4. Avoid risks altogether (e.g. by closing down a particular high-risk business area)


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Foreign exchange risk

It is a financial risk that exists when a financial transaction is denominated in a currency other than that of

the base currency of the company. The risk is that there may be an adverse movement in the exchange

rate of the denomination currency in relation to the base currency before the date when the transaction is

completed.

Extrapolating exchange rate risk at IRFC:

As a regular borrower from the Overseas Market, IRFC takes loans from the External Commercial

Borrowings (ECB) with time periods stretching from 5 to 15 years both from the offshore and domestic

capital markets to meet the annual borrowings target that the Ministry of Railways mandates. Until 31st

March, IRFC’s total borrowings is Rs 6,198,414.16 lakh ($92,06.6471 million)

Loan wise details of ECB outstanding as on 31st March, 2015:

PARTICULAR YEAR AVAILED OUTSTANDING

AMOUNT

INTEREST

RATE

TERMS OF

REPAYMENT

OF THE

BALANCE

AMOUNT

US Private

Placement Bonds

2007

2006-07 $125 Mio 5.94%, fixed

coupon, interest

payable half yearly

on 28th March and

28th September

each year

Bullet repayment

on 28th March

2017

Loan from AFLAC

(1)

2010-11 JPY 12 Bn Fixed interest rate

of 2.85%, interest

payable on 10th

March and 10th

September each

year

Bullet repayment

on 10th March,

2026


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Loan from AFLAC

(2)

2010-11 JPY 3 Bn Fixed interest rate

of 2.9%, Interest

payable half yearly

on 10th March and

10th September

each year

Bullet repayment

on 10th March,

2026

Syndicated

Foreign Currency

Loan $200 Mio

2011-12 $200 Mio $6m LIBOR +

1.25%, Interest

payable half yearly

on 23rd

September and

23rd March each

year

Bullet repayment

on 23rd

September, 2016

United Bank of

India (Note 2)

2015 Rs. 240,000 10% rate of

interest, linked to

Base rate, 7 half

yearly instalments

after an annual

moratorium of 2

years

Bullet repayment

on 30th March,

2017

Andhra Bank 2015 Rs.20,000 lakh 10.25% interest

rate, Linked to

Base rate

Bullet repayment

on 30th June,

2016

Reg-S Bonds 3rd

Series

2015 $500m 3.917% interest

rate semi annually

Bullet repayment

on 26th February,

2019

Reg-S Bonds 2nd

series

2015 $300m 3.417% interest

rate semi annually

Bullet repayment

on 10th October,

2017

US PP Bonds

2017

2015 $125m 5.94% interest

rate semi annually

Bullet repayment

on 28th March,

2017


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Allahabad Bank 2015 Rs.911.94 lakh 8.5% interest rate,

fixed

Quarterly repaid

on 30th June,

2016

Bank of India

(Note 2)

2015 Rs.25,000 lakh 10.2% interest

rate, Linked to

Base rate

Bullet repayment

on 30th March,

2018

Syndicated

Foreign Currency

Loan- $200 Mio

2015 Rs. 252,240 lakh $6m LIBOR

+1.47%

Bullet repayment

on 3rd December,

2018

External Commercial Borrowings are sought after means of acquiring money (liabilities) as it is more cost

effective in juxtaposition to the domestic markets as low interest rate. For example, in India the lending

interest rate as of 26th May, 2016 is 6.5%, in contrast with that of US, which is 0.5%. Nonetheless,

exchange rate borrowings is subjected to constant forex rate variations that can imaginably demolish

IRFC’s financial balance sheets and pose a skyrocketing interest rate risk, with accelerating spreads

between T-bills issued by the government and offshore borrowings.

TYPES OF RISK:

Transaction exposure

Transaction exposure is the risk, faced by companies involved in international trade that currency

exchange rates will change after the companies have already entered into financial obligations. Such

exposure to fluctuating exchange rates can lead to major losses for firms.

Often, when a company identifies such exposure to changing exchange rates, it will choose to implement

a hedging strategy, using forward rates to lock in an exchange rate and thus eliminate the exposure to the

risk.

Economic exposure

IRFC has forecast risk to the degree that its market value can be influenced by unexpected exchange

rate fluctuations. Such exchange rate adjustments can severely affect its market share position with

regards to its competitors, its future cash flows, and ultimately IRFC’s value. Economic exposure can


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affect the present value of future cash flows. While economic exposures cannot be hedged, they can be

managed by, product differentiation, pricing, branding, outsourcing, etc.

Translation exposure

This exposure arises from the effect of currency fluctuations on a company’s consolidated financial

statements, particularly when it has foreign subsidiaries. This type of exposure is medium-term to long-

term.

Risk mitigation strategies to curb exchange rate variation risk:

Over the cost of marginal (incremental) borrowings and leases implemented with the MOR, IRFC

allocates a very narrow margin of only 50 bps. Thus, IRFC cannot undertake risk associated with

wavering exchange rates with its colossal portfolio of foreign borrowings.

Keeping that in mind, IRFC follows a proactive mechanism to lessen cash/credit flow risk arising due to

transaction exposure, and balance sheet risk arising due to translational exposure.

Mechanisms:

● HEDGE PRINCIPAL AMOUNT OF FOREIGN CURRENCY- This is done in the beginning

using Currency Swaps (principal only).

1. Favourable market conditions: This incorporates cost of hedging while calculating the

weighted average costs of funds to equalise the IRR on the leases that are executed with the

MOR. It is responsible for core hedging.

2. Unfavourable market conditions: Incorporate variation clauses in the Lease Agreements that

enables IRFC to transfer the exchange rate variations to MOR. Notwithstanding, IRFC continues

to monitor the market watchfully till the yield of maturity, and concludes the currency swaps at the

most opportune time.

● HALF YEARLY PAYMENTS WITH NO HEDGE OF EXCHANGE RATE VARIATIONS :

These risks are transferred to MOR

● BORROW 2 CURRENCIES (YEN AND US DOLLAR): Because yen is very volatile, IRFC

coverts yen exposure risk to that of dollar via Cross Currency Swap.


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Loan wise exchange rate risk management strategy of IRFC:

PARTICULARS AMOUNT

OUTSTANDING

EXCHANGE

RATE

VARIATION:

HEDGED OR

NOT

UNHEDGED

EXPOSURE TO

IRFC’S

ACCOUNT

UNHEDGED

EXPOSURE TO

MOR’S

ACCOUNT

Syndicated

Foreign Currency

Loan

$200 Mio No No Yes

Eurodollar Bonds

(Series 2)

$300 Mio No No Yes

Syndicated

Foreign Currency

Loan

$400 Mio No No No

Eurodollar Bonds

(Series 3)

$500 Mio No No Yes

US PP Bonds

2017

$125m No No Yes

Syndicated FC

Loan-2015

$350m No No Yes

Loan from AFLAC JPY 15 Bn

equivalent to

$182.94m

Partial hedging at

the time of

inception, JPY

Exposure

converted to USD

Cross Country

Swap

No Yes, dollar

exposure

EDC-3 $3.2m No Yes (ERV on

Principal portion)

Yes ( ERV on

interest portion)


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Loan from AFLAC

(2)

JPY 3 bn No No Yes

Bank of India-FCL $30M No No No

FORECASTING EXCHANGE RATES:

● Quantify the annual rate of depreciation of USD w.r.t INR: If future exchange rates

follow the historical trend, we can project the future exchange rates on various dates.

● Calculate the weighted historical annual rate of depreciation :

DATE USD

Y-To-Y DEP

(%)

NUMBER

OF

WEIGHTS WEIGHT

Y-To-Y

DEPRECIATIO

N RATE (%)

3/31/2004 43.39

3/31/2005 43.75 0.83 1 0.0128 0.010624

3/31/2006 44.61 1.97 2 0.025644 0.050432

3/31/2007 43.59 -2.29 3 0.038461 -0.08702

3/31/2008 39.97 -8.3 4 0.05128 -0.415

3/31/2009 50.95 27.47 5 0.064102 1.75808

3/31/2010 45.14 -11.4 6 0.076923 -0.798

3/31/2011 44.65 -1.09 7 0.089743 -0.09701

3/31/2012 51.1565 14.57 8 0.10256 1.4934

3/31/2013 54.405 6.351 9 0.11538 0.698616

3/31/2014 60.964 12.055 10 0.128205 1.4586

3/31/2015 62.524 2.558 11 0.14102 0.035812

3/31/2016 66.869 6.949 12 0.153846 0.1042

78 4.21273 Annual rate

Day’s rate


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SOME USEFUL MEASUREMENT TOOLS:

1. Purchasing Power Parity

PPP theory most commonly links the changes in exchange rates to those in relative price indices in two

countries.

Rate of change of exchange rate = Difference in inflation rates

According to this relationship, in the absence of trade restrictions, changes in the exchange rate mirror

changes in the relative price levels in the two countries. Simultaneously, under conditions of free trade,

prices of similar commodities cannot differ between two countries, because arbitrageurs will take

advantage of such situations until price differences are eliminated.

This "Law of One Price" leads logically to the idea that what is true of one commodity should be true of

the economy as a whole--the price level in two countries should be linked through the exchange rate--and

hence to the notion that exchange rate changes are tied to inflation rate differences.

Effects of exchange rate changes on operational cash flows:

1. Volume effects: compensates for changes in profit margins

2. Diversification: to enhance and widen the scope of inputs processed and outputs released

3. Pricing flexibility: alters the margins to offset the effects of exchange rate change

4. Production and Sales Flexibility: ability to quickly shift markets and sources

Inventories may serve as a good illustration of this proposition. The value of an inventory in a foreign

subsidiary is determined not only by changes in the exchange rate, but also by a subsequent price

change of the product--to the extent that the underlying cause of this price change is the exchange rate

change. Thus, the dollar value of an inventory destined for export may increase when the currency of the

destination country appreciates, provided its local currency prices do not decrease by the full percentage

of the appreciation.

Again, price and cost adjustments need to be analysed. For example, a firm that requires raw materials

from abroad for production will usually find its stream of cash outlays going up when its local currency

depreciates against foreign currencies. Yet the depreciation may cause foreign suppliers to lower prices

in terms of foreign currencies for the purpose of maintaining market share.


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2. Covered Interest Rate Parity:

According to covered interest rate parity, forward exchange rates should incorporate the difference in

interest rates between two countries; otherwise, an arbitrage opportunity would exist. In other words,

there is no interest rate advantage if an investor borrows in a low-interest rate currency to invest in a

currency offering a higher interest rate. Typically, the investor would take the following steps:

● Borrow an amount in a currency with a lower interest rate.

● Convert the borrowed amount into a currency with a higher interest rate.

● Invest the proceeds in an interest-bearing instrument in this (higher interest rate) currency.

● Simultaneously hedge exchange risk by buying a forward contract to convert the investment

proceeds into the first (lower interest rate) currency.

The returns in this case would be the same as those obtained from investing in interest-bearing

instruments in the lower interest rate currency. Under the covered interest rate parity condition, the cost of

hedging exchange risk negates the higher returns that would accrue from investing in a currency that

offers a higher interest rate.

Mathematically, (1 +Rd) = (1+Rf)* (Ft/So), where:

● Rd= Domestic risk free interest rate measured in terms of yield on INBMK

● Rf= Foreign risk free interest rate measured in terms of Yield on Securities issued by the foreign

government

● Ft= Forward rate

● So= Spot rate

3. Measurement of risk: Value at Risk (VaR)

This technique examines the tail end of a distribution of returns for changes in exchange rates to highlight

the outcomes with the worst returns. Using the VaR model helps risk managers determine the amount

that could be lost on an investment portfolio over a certain period of time with a given probability of

changes in exchange rates.

Value-at-Risk calculation

The VaR measure of exchange rate risk is the method that IRFC uses to estimate the riskiness of a

foreign exchange position resulting from a firm’s activities, including the foreign exchange position of its

treasury, over a certain time period under normal conditions. The VaR calculation depends on 3

parameters:


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● The holding period, i.e., the length of time over which the foreign exchange position is planned to

be held. The typical holding period is 1 day.

● The confidence level at which the estimate is planned to be made. The usual confidence levels

are 95% and 99%

● The unit of currency to be used for the denomination of the VaR.

4. Steps in Managing Economic Exposure:

1. Estimate planning horizon determined by the reaction period.

2. Deduce the expected future spot rate

3. Estimate the expected revenue and cost streams, given the expected spot rate

4. Theorize the effects of revenue and cost streams for unanticipated exchange rate changes

5. Make rational choice for appropriating debt of a particular based on risk associated with each

currency

6. Assess the requisite amount of foreign currency debt

7. Measure the mean interest period of debt

8. Select between direct or indirect debt denomination

9. Decide on trade-off between arbitrage gains and exchange risk stemming from exposure in

markets where controls distort rates.

10. Decide about residual risk: consider adjusting business strategy.

Philosophy of Exchange Rate Risk Management:

● IRFC strives to regulate the risk that annuls financial margins and has tenuous impact on cash

flows.

● It will partially hedge ECBs, such that it corporates costs in the lease pricing with MOR.

● It will keep the ECB values below the cost of borrowings from the domestic markets with equal

tenure. The aim is to minimize costs to MOR and use ECB to fund at low costs for MOR

● IRFC must only use the derivatives sanctioned by the RBI to cap exchange rate risk of IRFC, and

not for speculating.

● It will contract derivative products to curtail the risk transferred to MOR and later on recover the

costs.


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Measurement of Exchange rate risk on MOR’s account:

● IRFC measured transaction exposure in terms of fluctuations in the effective cost of borrowings

for distinct ECB transaction to fluctuations on the exchange rates.

● MOR doesn’t generate its account following the standard procedures of Accounting issued by the

Institute of Chartered Accountants of India (ICAI) and notified by the Ministry of Corporate Affairs

(MCA). Hence, MOR is immune to any transnational risk.

Particulars Year and

amount availed

Interest rate Principal

repayment

Remarks

Syndicated

Foreign Currency

Loan- $ 200 Mio

2011-12, $200 Mio $6m LIBOR +

1.45%

Bullet repayment

at the end of 5

years

Variation clause is

incorporated in the

Lease Agreement

for 2011-12 to

protect IRFC .

POS Cost can be

recovered from

MOR. Swap cost

is refundable as

not swaps have

been purchased.

Eurodollar Bonds

(Series 2)

2012-13, $300 Mio Fixed interest rate

of 3.417%

Bullet repayment

at the end of 5

years

Variation clause is

incorporated in the

Lease Agreement

for 2011-12 to

protect IRFC .

POS Cost can be

recovered from

MOR. Swap cost

is refundable as

not swaps have

been purchased.

Syndicated

Foreign Currency

2013-14, $400 Mio $6m LIBOR +

1.47%

Bullet repayment

at the end of 5

Variation clause is

incorporated in the


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Loan- $400 Mio years and 1 day Lease Agreement

for 2011-12 to

protect IRFC .

POS Cost can be

recovered from

MOR. Swap cost

is refundable as

not swaps have

been purchased.

Euro Dollar Bonds

(Series 3)

2013-14, $500 Mio Fixed interest rate

of 3.917%

Bullet repayment

at the end of 5

years

Variation clause is

incorporated in the

Lease Agreement

for 2011-12 to

protect IRFC .

POS Cost can be

recovered from

MOR. Swap cost

is refundable as

not swaps have

been purchased.

Observations:

1. IRFC has not hedged any of the above foreign transactions.

2. The variation clauses have been added in the lease agreement that safeguards IRFC from

unforeseen volatile exchange rate risk variations.

3. MOR is managing the associated risks.

Conclusion: IRFC is not exposed to any transnational and transaction risk.

Measuring Exchange Rate Variation Risk to MOR’s Account

Predominantly, IRFC has transferred the exchange rate volatility to the MOR. The exchange rate at which

drawdown happens is the Base Exchange rate. The lease agreement assimilates the base rate of the

requisite years when the ECBs were availed. Hence, any inconsistency is projected in MOR’s account,


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keeping IRFC insusceptible to the vagaries of exchange rate fluctuations. Nonetheless, as MOR is IRFC’s

shareholder, IRFC is duty-bound to minimise the risk.

ECBs are funds at very minimal costs that have attenuated IRFC’s total marginal borrowing costs, further

diminishing MOR’s costs. Notwithstanding the low costs, we can gradually convert INR in the capital

account, so it is even arduous to accumulate any benefits of lower costs given the relatively high

borrowing costs from the domestic market, but with negligible or minute risk.

MOR’s account considers forex rate risk that quantifies the sensitivity of ECB’s cost to exchange rate

fluctuations. The methodology is as follows:

● Project data wise outflows due on account of interest and principal of the ECB Loans over the

residual life of the ECBs

● Project exchange rates on various dates when the payment occurred under 5 different scenarios:

1. SCENARIO 1: Use the historical depreciation rate as shown

2. SCENARIO 2: Rate the depreciation at 5% above the historical depreciation rate

3. SCENARIO 3: Raise it to 10% depreciation rate

4. SCENARIO 4: Finally, to 15%

5. SCENARIO 5: Using the exchange rate projected based on Covered Interest Parity Rate

● Consider the actual payments that have already been deposited till the date of analysis, and the

future cash flows based on the projected exchange rates as determined above.

● Calculate the effective cost of ECB


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Effective cost using historical rate of depreciation (in %):

Particulars Scenario 1

(Annual

depreciation

rate till

31/3/2016 at

5.536%)

Scenario 2

(Annual

depreciation

rate of INR

till 31/3/16 at

5.536% +

5%)

Scenario 3

(Annual

depreciation

rate of INR

till 31/3/16 at

5.536% +

10%)

Scenario 4

(Annual

depreciation

rate of INR

till 31/3/16 at

5.536% +

15%)

Scenario 5

(Forecasting

the INR via-

a-vis USD

using

Covered

Interest

Parity Rate)

US PP Bond 11.01 13.1 15.14 17.13 16.43

Eurodollar

Bond 500 Mio

(2013-14)

8.56 8.59 9.36 9.82 6.12

Eurodollar

Bond (2012-

13)

13.33 17.44 21.51 25.55 24.6

Reg-s Bonds

3rd Series

$500Mio

8.99 12.08 15.14 18.19 15.78

Eurodollar

Bond

13.67 17.81% 21.91 25.98 23.21

Loan from

AFLAC

13.05 17.84 22.62 27.39 26.54

IRFC has to cap risk to handle foreign exchange exposure. Also, it has to decide whether to manage its

exposure on a cost centre (defence approach) or a profit centre (aggressive approach) basis. While the

cost centre approach is the defensive one to ensure that the cash flows of IRFC are not adversely

affected beyond a point, the profit centre approach ensures that profits are maintained by exposing over

time.


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Setting Exchange Rate Risk Exposure Limits:

● Exposure to IRFC’s Account: Since IRFC charges only 50 bps as margin for its lease

transactions with MOR and targets a year-to-year profit growth of 8-105, it cannot undertake

significant foreign exchange exposure.

● Upper limit: The Board of Directors should settle this keeping in mind the ratio of excess cash

outflows due to transaction exposure, to total projected cash profit. This should be reviewed

periodically accounting for the changing market conditions and profitability outlook.

● Exposure to MOR’s account: The effective INR cost of individual ECBs should be

benchmarked to the cost of borrowings from the domestic markets of same tenure when IRFC

availed the ECBs. This will measure the impact of exchange rate variation on MOR’s account.

● Annual break even depreciation rate: This should be computed over the balance tenor of

each ECB. It is the annual rate of depreciation over the balance tenor of each ECB such that the

effective cost of ECB is commensurate with borrowing costs from the domestic market of same

tenor.


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Break even rate of depreciation of INR vis a vis USD:

Loans Cost of ECB to

compute weighted

average cost (%)

Cost of domestic

borrowing of

equivalent tenor (%)

Rate of depreciation

in INR over the

balance tenor of

ECB to match the

effective cost of

ECB with the cost of

borrowing from

domestic market of

equivalent tenor (%)

US PP Bond 7.83 8.57 -0.15

Eurodollar Bond 500

Mio (2013-14)

9.59 8.82 18.29

Eurodollar Bond (2012-

13)

9.3 9.52 0.18

Reg-s Bond 3rd Series

$500 Mio

17.43 18.19

Eurodollar Bond 6.5 9.52 0.6

Loans from AFLAC 6.61 9.3 2.36

HEDGING:

Establish suitable hedging means, given IRFC’s restrictions to not expose or abate it.

1. Hedging Exposure to IRFC’s Account:

To eliminate transaction and translational exposure, IRFC’s Board of Directors has put a ceiling on the

amount of profit it will earn. If the expected future exchange rate depreciates, it will breach the ceiling.

The Risk Management Committee will commence the right mechanism to dwindle the risk.


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2. Hedging Exposure to MOR’s Account:

● IRFC has set the ceiling on costs accrued to it when funds are availed to lease pricing and

borrowing rates from domestic market of equivalent tenor

● Value will be added to MOR’s account only when the effective cost of ECB is below the cost of

domestic borrowings of equivalent tenure for that year.

● IRFC will scrutinize the markets over the life of the loan as it has a defensive approach. It will

hedge if all-in-rupee cost including the cost of hedging is less than or equal to the cost assigned

to it in whichever year the hedge fund is availed to lease pricing.

● If IRFC hedges on behalf of MOR, costs will be recovered from MOR.

Hedging Instruments:

IRFC will only use derivatives sanctioned by RBI to hedge forex exposure. IRFC will use derivatives at

Over the Counter (OTC) markets to hedge risk completely. Following are the derivatives used:

● Forward Contracts: IRFC uses forward contracts to hedge exchange rate risks associated with

half yearly payments or amortized payments to borrow loans from FCL, BOI, EDC etc.

● Options: It carries both rights and obligations. If INR depreciates, IRFC cannot engage in buying

and selling options. Moreover, if there an indefinite trend that shows a cyclical volatility in forex

rates, IRFC should avoid transacting options.

Regulatory oversight and mechanism: Building Transparency

● Risk Management Committee of IRFC is a Board Level subcommittee headed by Managing

Director, Director of Finance and an independent Director. All of these high ranking personnel will

manage the risks.

● Risk Management committee will meet at least quarterly and discuss various reports. These

reports will ascertain and apprise the member of any possible limit breaches, and explain the

causes and repercussions of these limit breaches. The Board will consider and review the


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process and solutions, before giving the green light signal to implement a new solution or set a

new target.

● The General Managers which head the Senior Management team attend the meetings of Risk

Management Committee and supplement their inputs. This team will adhere to the limits of risk

and risk management strategies approved by the Risk Management Committee and the Board.

● To solve any contentious matters, an officer who is independent of the front desk operations such

as those in the Raising and Deployment of Resources will prepare Risk Limit reports.

● An Internal Auditor will verify the authenticity and efficacy of the reports and look for possible

breaches, violations and other loopholes.

● Within these procedural matters, the External Consultant’s recommendations are critical as these

advices will determine which and how much external hedging techniques that IRFC will ultimately

use.

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