ManagementofExchangeraterisk

2016
Sudiksha Joshi
Summer Intern, IRFC
6/10/2016
Foreign Exchange Rate Risk Management of
IRFC

Foreign Exchange Rate Risk Management of IRFC
1

2
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.

3
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

5
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

6
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

7
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)

9
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

10
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:

12
● 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.

13
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

14
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,

15
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

16
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.

17
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.

18
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.

19
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

20
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.

ManagementofExchangeraterisk

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