37. Objectives and principles of financial risk management

The basic risk factors which may affect the financial result of the Group include: the risk of changes in the prices of basic raw materials, interest rate risk, currency risk, credit risk, liquidity risk, and risk related to extraordinary events. The Management Board verifies and agrees on the principles of the management of each of the aforementioned risks and these principles are briefly discussed below. The Group also monitors the risk of market prices applicable to all financial instruments managed by it.

The basic objectives of the Group financial risk management process are as follows:

• ensuring financial liquidity;
• limiting the direct impact of fluctuations in interest rates, exchange rates and aluminium prices on the Group results;
• limiting the negative consequences of extraordinary events.

Risk management strategies applied:

• the risk of changes in the prices of basic raw materials – natural hedge strategy, i.e. offering variable prices to the customers based on the current price, e.g. aluminium quoting at LME, and conclusion of futures contracts to hedge the aluminium prices;
• interest rate risk – strategy of diversification of short-term base rates (the Group applies 1M, 3M, and 6M rates, which define fixed interest level in the respective periods of one, three or six months) and acceptance of risk up to the limit of the costs of finance determined in internal procedures, and financing based on fixed interest rates;
• currency risk – natural hedge strategy, i.e. offering variable prices to the customers based on the current exchange rates, adjustment of the raw materials purchase currency to the currencies applied in sales, and entering into forward transactions, plus use of revolving loans in foreign currencies in order to eliminate the consequences of different dates of currency inflows and payables;
• credit risk – internal verification supported with business intelligence information, plus insurance of the receivables from customers, and use of legal liabilities security measures;
• liquidity risk – diversification of lenders, adjustment of loans repayment periods to the capabilities of the Group, use of umbrella agreements within the Capital Group, with the possibility of fast change of debt sub-limits for the particular borrowers, and application of long-term loans as regard project finance;
• risk of exceptional occurrences – focus on risk limitation by way of risk transfer (insurance), technical audits aimed at risk mitigation, and diversification of the places of operation;
• operating risk – the Group keeps a register of and analyses the major risks, which are limited by actions (blockers) defined in accordance with the risk management system [ERM] adopted by the Group. The actions are described in the risk cards of the

• respective risks and supervised by the responsible persons. Details regarding the actions have been presented in the Report on the Group Operations.

Financial risk management objectives of the Capital Group

• The interest rate risk and currency risk are managed in order to limit the impact of short-term market fluctuations on the Group results.
• Managing the risk of changes in the prices of basic raw materials is aimed at the elimination of short-term impact of changes in the raw materials prices on the Group results, and specifically when the transfer of costs to the customer or arranging deliveries at fixed prices are not possible.
• Credit risk management is to reduce the possible financial losses on account of unpaid receivables and ensure financial liquidity.
• Liquidity risk management is to ensure the possibility of timely payment of liabilities by all of the Capital Group companies.
• Managing the risk of exceptional occurrences is to develop the methods of conduct which will ensure safety to the employees and compliance with laws in exceptional situations, as well as to supervise the reasons and places of such risk occurrence, plus obtaining indemnities under insurance policies.
• The major risks of the Capital Group, covering also other (non-financial) areas, have been described in the Report of the Management Board.
• Management of the other operating risks, including but not limited to the risk of missing effective supply chain, the risk of disturbances or breaks in IT infrastructure operation, risk of the absence of proper and sufficient staff, is aimed at current adjustment of the methods of conduct to the changes and needs, as well as product and geographical diversification, or other risk limiting actions (blockers) described in the ERM documentation. Major risks of the Capital Group have been described in detail in the Report of the Management Board.