MINISTRY OF EDUCATION AND TRAINING UNIVERSITY OF ECONOMIC HOCHIMINH CITY ---- K --- LUC THAO PHUONG HA FINANCIAL DERIVATIVES INSTRUMENT TO HEDGE EXCHANGE RATE RISK IN VIETINBANK BRVT BRANCH In Banking and Finacial Ology code: 60.12 MASTER’S THESIS Supervisor : Dr.TRAN HUY HOANG Ho Chi Minh City – 2010 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com Financial Derivatives 0 DECLARATION I assure that this thesis is my research. This thesis has not already been submitted for any degree and is not being currently submitted for any other degree. The extracts and data from the other studies have been cited clearly. I bear full responsibilities for whatever un-honest of this thesis.
Luc Thao Phuong Ha August, 2010 i LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com Financial Derivatives 1 ACKNOWLEDGMENTS It is a good opportunity to participate to the master’s course of Banking in English, which is conducted by the University of Economic Hochiminh City, Faculty of Banking Course. I have achieved a lot of knowledge, methodology, techniques and new ideas from this course. This thesis is a part of my accumulative knowledge that I have gathered from the teachers, classmates and the colleagues. First of all, I would like to express my grateful and indebtedness to my supervisor, Associate Professor Ph.D Tran Huy Hoang who provided me the precious methodology.
He helped me a lot in construction of the thesis structure, and gave me the new ideas in analysis. This thesis could not be done without his contribution. I also would like to extend my sincere thanks to all the teachers, who have improved my knowledge of development economics and other social economics understanding. I am grateful for the help from the board of director of Vietinbank Baria Vungtau branch, Mr Tu Nhu Phong, Mr Nguyen Huu Son, Ms Thu Ha, and all my colleagues, who have facilitated me in this research.
I highly appreciate the helps from Mr Kien Quoc, Mr Manh Ha, Mr Thanh Hai and all classmates of class of Banking, course 16, who have made a good condition for my study. I would like to give my thanks to all of them. Finally, I express my love to all members of my family, who have encouraged me in the progress of my studying and completing this thesis. Luc Thao Phuong Ha.
ii LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com Financial Derivatives Abstract Based on the theory of foreign exchange (forex) market and foreign exchange risk management, this thesis focuses on the involved banking products used to manage risks in trading forex operation. They are financial derivatives. Financial derivatives are rare in Vietnam although they are widely used in international market. An overview of Vietnam forex market from 2007 to now demonstrated to give the reasons why it is necessary to manage foreign exchange risk and what can be done to mitigate risks? Finally, suggestions for applying financial derivative instruments in Vietnam Bank for Industry and Trade (Vietinbank), Baria Vungtau Branch as a new banking transaction are discussed to enhance its position in local province.
iii LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com Financial Derivatives TABLE OF CONTENT Page INTRODUCTION. The rational of the study. Statement of the research problem. Research questions and objective.
Signification of the study. Structure of the study. 5 CHAPTER ONE: FINANCIAL DERIVATIVES IN FOREIGN EXCHANGE TRADING IN COMMERCIAL BANKS 1.1 Foreign exchange trading in commercial banks .1 What is a commercial bank? .2 Banking transactions – foreign exchange trading.3 Risks in foreign exchange trading.4 The necessity of managing foreign exchange risk .2 Financial derivatives in foreign exchange trading in commercial banks.1 What are financial derivatives?.2 Types of financial derivatives in exchange trading .3 Functions of financial derivatives .3 Conditions to apply and develop financial derivatives of foreign currency.1 Commercial banks’ internal conditions .2 Commercial banks’ external conditions. 24 iv LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com Financial Derivatives CHAPTER TWO: RESEARCH METHODOLOGY 2.4 Scope of the research and data analysis.
34 CHAPTER THREE: CURRENT SITUATION IN FOREIGN EXCHANGE TRADING IN VIETINBANK BARIA VUNGTAU BRANCH 3.1 Background of Vietnam’s forex market.1 Characteristics of Vietnam’s forex market .2 Forex trading in BRVT province and Vietinbank BRVT branch .1 Unexpected movement of foreign currency impact on businesses’ activites .2 Business’ demand for using derivatives .3 Vietinbank Baria Vungtau branch and perceptions about application of derivatives .1 Forward and option contract .2 Combining financial derivatives with credit policy.3 Reasons why derivatives are not popular used in BRVT province. 57 v LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com Financial Derivatives CHAPTER FOUR : CONCLUSION AND RECOMMENDATION 4.1 Conditions for developing foreign exchange derivatives .3 Limitation of study and suggestion for further ones. 65 LIST OF REFERENCES. 68 ABBREVIATION AUD: Australian dollars BRVT: Baria Vungtau CBI : Central Bank Intervantion CPI: Customer purchase Index EUR: Europe dollar Forex market = FX: Foreign exchange market GBP: Greatain Bristish Pound GDP: Gross domestic product IMF: International Monetary Fund JPY: Japnanese yen OTC: Over the Counter SBV: The state bank of Vietnam SOCB: The state-owned commercial banks USD: United States dollar VND: Vietnam dong Vietinbank: Vietnam Bank for Industry and Trade WB: World Bank WTO: World Trade Oragnization vi LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com Financial Derivatives LIST OF CHART Chart 1.1: AUD/USD rate’s movement 10 years.1: Outline of Research methodology.2: Outline of Hypothesis and variables .1: Density inward of foreign currencies.2: The movement of VND/USD period 1999 – 2009 .3: Import – Export turover in BRVT province .4: Volume of USD trading in Vietinbank BRVT branch.5: USD transferred to Vietinbank from exporters, remittance and demand for USD from importers .6: Derivatives trading in Vietinbank BRVT branch and Other banks in BRVT province.
52 LIST OF TABLE Table 3.1: Summary of the kind of investigated companies.2: Descriotive statistic about impact of forex on companies’ activities .3: Correlation and coefficient of Q7, Q8, Q9 and Q18.4: Correlation and coefficient of Q10, Q11, Q12, Q13, Q14 and Q18.5: Correlation and coefficient of Q15, Q16, Q17 and Q18.6: Frequency analysis of Q19, Q21, Q22.7: Frequency analysis of Q23, Q24, Q25, Q26, Q27.8: Frequency analysis of Q28, Q29 and Q29B. 50 vii LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com Financial derivatives INTRODUCTION 1. The rationale of the study In the recent years, the foreign exchange market in Vietnam has been formed and developed. This is actually necessary for Vietnam in the process of integrating into the international economy.
Vietnamese businesses as well as commercial banks have recently improved their operating abilities to run the business in the global field. The operation of the foreign exchange market plays an important role in promoting the international foreign trade and economic cooperation among countries. Foreign exchange transaction not only has been now considered as one of important banking services of commercial banks, but also marked a new step forward of banking – modernizing movement. Transactions conducted in the foreign exchange market determine the rate at which currencies are exchanged.
The major transactions in foreign exchange market are spot, forward, swap, future contract and currency option. The basic of those transactions is the exchange rate. Exchange rate affects the relative price of domestic and foreign goods, hence exchange rate volatility strongly affects the foreign trade activities between countries. The year 2008 was coming with the pessimistic image of the global economy.
It started with the American sub-prime crisis, the international fluctuating price of oil – up and down rapidly, the high inflation and the global economic slowdown… therefore, the forex market around the world has been operating on unexpected movement. Since the event that Vietnam became the official member of WTO, we are directly impacted by these turmoil tendencies, influencing deeply in our country’s emerging economy. The more Vietnam integrates into global economy, the riskier in currency exchange rate the businesses have to exposure. In order to support local import-export enterprises, commercial banks have to develop many kinds of derivatives in foreign currency transaction for hedging exchange rate risk.
Vietnam commercial banking system has recently increased its’ abilities to meet the international banking standards. As one of members of Vietnam banking system, 1 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com Financial derivatives 2. Statement of the research problem Foreign exchange risk management is crucial for businesses frequently trading in the international market. There are many kinds of financial instruments used to risk management, in which financial derivatives have been most popularly used in hedging.
Financial derivatives include four main types: forward, future, swap and option. They have been widely used for hundreds of years in international market such as stock market, commodity market, foreign exchange market … Speculators use them to implement their arbitrage transactions to gain profit in financial market. However, the most important effect of financial derivatives is hedging risks – fluctuant changing in prices of goods. In the foreign exchange market, this effect is more important to prevent investors from the rate’s volatility.
Firstly, this thesis analyzes risks derived from forex market, and the importance of forex risks management. Then it aims to explain why derivatives have not implied widely in Vietnam yet, and how to encourage this kind of financial instruments as new banking services in Vietnam banks – especially in Vietinbank BariaVungtau branch. The current Vietnamese foreign exchange market will be generally demonstrated, giving its changes affected by outside factors and its influences on local import-export businesses. Then some conditions for development of derivative instruments for hedging foreign exchange rate in Vietnam are analyzed in detail, 2 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com Financial derivatives 3.
Research questions and objectives 3.1: Research questions: The aim of this thesis is to learn about the foreign exchange risk in general and the importance of currency exposure management in BariaVungtau enterprises by using currency derivatives. The research question is formulated as follow: How can financial derivatives’ instruments be developed as crucial banking transactions in Vietinbank BariaVungtau in order to enhance the bank’s competitiveness? To answer for this question, this thesis will analyze following aspects: (1) The importance of hedging risks in international trading of import – export enterprises as well as banking transactions in terms of foreign exchange. (2) Reasons of financial derivatives not been popular used in BariaVungtau’s enterprises as well as in Vietinbank BariaVungtau branch (3) Perception of foreign currency exposure management in Vietinbank and what financial derivatives – products and services – the bank can provide customers (4) How to use financial derivatives instruments as a managerial method to strengthen Vietinbank Baria Vungtau Branch’s competitiveness and protect the bank from foreign exchange risk.2: Research objectives To learn about risks faced in international trading in terms of currency – the large and rapid fluctuant movement in exchange rate in Vietnam. To study the demand of import – export enterprises in BariaVungtau province whether foreign exchange hedging risk is important? 3 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com Financial derivatives To launch some kinds of financial derivatives in term of foreign exchange to meet market’s demand as well as increase Vietinbank BRVT branch’s ability as the best commercial bank in BRVT province.
Research methodology The scope of this thesis is to study about import-export enterprises in BariaVungtau province, but not to cover Vietsovpetro Joint-venture because this enterprise’s output (mainly from crude oil export) has large proportion in total foreign trade turn-over in BariaVungtau province. In this thesis, observing method is employed to expose volatility of foreign exchange rate which causes risk in international trade. From data of forex transactions traded in 2006 to the first quarter of 2010 in Vietnam and global forex market, the trend of exchange rate in Vietnam toward the international movement will reflect the severely impact on import – export operations in local province.