STATE BANK OF VIETNAM BANKING ACADEMY Faculty of Foreign Languages ---------- GRADUATION THESIS DEVELOPMENT OF DERIVATIVES MARKET IN VIETNAM LECTURER : Pham Nhu Luan (M.A) STUDENT : Tran Thi Giang CLASS : K15ATCC STUDENT CODE : 15A7510048 Hanoi, May 25th 2016 i ACKNOWLEDGEMENTS Firstly, I would like to express my sincere gratitude to my thesis advisor M.A Pham Nhu Luan for his great interest and assistance in the preparation of this thesis. Besides my advisor, I would like to give special thanks to all lecturers in Faculty of Foreign Languages since having taught and encouraged me during the last four years at Banking Academy. Last but not least, I am grateful to my friends for their support and motivation during the thesis complement process. Hanoi, May 2016 Tran Thi Giang i Faculty of Foreign Languages Banking Academy ABSTRACT Although derivatives market has been developing successfully in many countries around the world, derivatives instruments are quite new for Vietnamese investors.
Based on knowledge about the derivatives I have learned at Banking Academy and real information related to process of forming the derivatives market of some Asian countries, this thesis conducts a study of the reality of developing the derivatives market in Vietnam. Since then, the thesis quotes some lessons for Vietnam to build a sustainable market. By analyzing figures and summarizing opinions of financial analysis specialist, the research will show that the current context of the Vietnam’s stock market is very appropriate to build and develop the derivatives market aim at solving short-term difficulties of financial market in Vietnam. There are four chapters in the research: Chapter 1: Introduction Chapter 2: Literature review Chapter 3: Research methodology and data analysis Chapter 4: Recommendations and conclusions ii Faculty of Foreign Languages Banking Academy TABLE OF CONTENTS ACKNOWLEDGEMENTS i ABSTRACT.
ii TABLE OF CONTENTS. iii LIST OF TABLES AND FIGURES .vi LIST OF ABBREVIATIONS. vii CHAPTER I: INTRODUCTION .1 Current problem statement .2 Objective and research questions .3 Scope and limitations .3 CHAPTER 2: LITERATURE REVIEW .1 An overview of derivative securities .1 A brief history of derivatives and derivatives markets .2 Definition of derivatives .4 Purposes of using derivatives .8 iii Faculty of Foreign Languages Banking Academy 2.5 Types of Derivatives .2 Forwards/ Forward contracts.2 Parties of a forward contract .3 Characteristics of a forward contract .4 Payoffs from forward contracts .3 Futures/ Future contracts .2 Parties of a futures contract .3 Characteristics of a futures contract .4 Trading mechanism on the futures market .2 Participants in options .3 Types of options .6 Summary for literature review .19 CHAPTER 3: RESEARCH METHODOLOGY AND DATA ANALYSIS .21 iv Faculty of Foreign Languages Banking Academy 3.1 Overview of global derivatives markets in recent years .2 Reality of developing derivatives market in Vietnam .1 Reality of using derivatives products in Vietnam .2 Overview of Vietnam’s stock market in recent years .3 Legal framework for operation the Vietnam’s derivatives market .4 Opportunities in building the derivatives market in Vietnam .5 Challenges in building the derivatives market in Vietnam .3 Asian countries’ experiences in developing the derivatives market .41 CHAPTER 4: RECOMMENDATIONS AND CONCLUSIONS .48 v Faculty of Foreign Languages Banking Academy LIST OF TABLES AND FIGURES List of tables Table 2.1 Exchange-traded versus Over-the-counter (OTC) Market 7 Table 2.2 Examples of Common Derivatives 10 Table 3.1 Vietnamese commercial bank pilot the derivatives products 28 Table 3.2 Derivatives on stock indices traded on several exchanges in the world 34 List of figures Figure 2.1 Payoffs from forward contracts 14 Figure 2.2 Trading mechanism on the futures market 17 Figure 3.1 Global derivatives trading volume 21 Figure 3.2 World stock market capitalization January 1992 to May 2015 22 Figure 3.3 Growth in exchange-traded derivatives 23 Figure 3.4 Total volume of Derivatives on Global exchange-traded derivatives 24 market Figure 3.5 Notional amount of global outstanding OTC derivatives contracts 25 Figure 3.6 Gross market value of global outstanding derivatives contracts 26 Figure 3.7 Vietnam’s stock market capitalization value 29 Figure 3.8 Market capitalization of Asia countries in 2014 30 Figure 3.9 VN-index movements in 2014 31 Figure 3.10 HNX – index fluctuation in recent years 32 vi Faculty of Foreign Languages Banking Academy LIST OF ABBREVIATIONS ETD Exchange-traded derivatives OTC Over-the-counter CBOT Chicago Board of Trade CME Chicago Mercantile Exchange BIS The Bank for International Settlements GDP Gross Domestic Product HNX Hanoi Stock Exchange HOSE Ho Chi Minh Stock Exchange SCC State Securities Commission VSD Vietnam Securities Depository FX Foreign exchange SIMEX Singapore International Monetary Exchange JSCC Japan securities Clearing Corporation TSE Tokyo Stock Exchange vii CHAPTER I: INTRODUCTION 1.1 Current problem statement In the late 20th century, a strong financial innovation trend formed a financial market area with a wide scale around the globe and grew at a very high speed, which is derivatives market. Derivatives in general and the derivatives market in particular have increasingly played an integral role in the whole development of global financial market and stock market.
Even in the condition of global financial economy volatility, the derivatives market has still grown very strongly on both exchange – traded market and over – the – counter market. The reason is that the derivatives are effective risk hedging instruments, helping market participants to minimize risks before market fluctuation. In Vietnam, derivatives originated from commodity and currency have been used for many years, which shows investors’ demand for finding an insurance tool before changes in real assets price (rice, coffee,…). In addition, although Vietnam’s stock market has operated for 15 years, the number of trading goods is not diverse, just including common stock, a few of investment fund certificates.
Therefore, it is very essential to build a derivatives market in Vietnam to meet investors’ demand for risk management prior to the market volatilities. As a result, in 2014 Prime Minister Nguyen Tan Dung has approved the project of "Building and developing the derivatives market in Vietnam" to build a centralized and unified derivatives market operating under the management of the State rather than a freely formed and spontaneous market. Then, Decree No.42/2015/NĐ-CP on derivatives and derivatives market was issued by Government, and Circular 11 was launched by Ministry of Finance in January 2016 to guiding for a number of contents of Decree No. This creates a fundamental legal framework for the first derivatives market establishment in Vietnam.
The derivatives market is quite new to Vietnam, so it is undeniable that developing a State-controlled centralized derivatives market following international technical 1 Faculty of Foreign Languages Banking Academy standards brings both opportunities and challenges for Vietnam. Therefore, it is much necessary to do research about the market development conditions, preparation for operate the Vietnam’s derivatives market in 2016 as well as orientations for developing the derivatives market in parallel with the stock market until 2020. Furthermore, it is truly crucial to be aware of opportunities and challenges in the process of setting up the formal derivatives market in Vietnam. Since then, Vietnam may learn from international experiences of some countries in region succeeding in developing the derivatives market like Japan, China, Singapore … 1.2 Objective and research questions 1.1 Objective The objective of this study is to understand about some kinds of derivatives instruments, including their characteristics, roles, trading market… as well as the derivatives market’s features, market participants.
Then, it is essential to find out development of global derivatives market, reality of using the derivatives in Vietnam and current Vietnam’s market conditions compared to other countries. Also, the main target is to have a comprehensive look at developing the Vietnam’s derivatives market, including potentials along with difficulties for authorities, securities companies and market participants. Finally, the thesis hopefully could offer several recommendations to tackle the existing issues.2 Research questions The thesis should be able to answer the following questions: What are the derivatives? What are the features and roles of derivatives? What is the derivatives market development roadmap in Vietnam? What conditions do the market participants need to enter into the market? What opportunities and challenges for authorities and market participants? Tran Thi Giang 2 15A7510048 Faculty of Foreign Languages Banking Academy What can Vietnam learn from other countries’ experiences? What should be done to deal with the problem? Scope and limitations The research mainly concentrates on highlight global derivatives market and reality of developing the derivatives market in Vietnam. The study also indicates the derivatives market operation of some Asian countries.
Nonetheless, because of time constraints and knowledge limitation, the thesis is not able to provide a detailed and deep analysis about all the aspects involving in the issues. Research methodology The thesis mostly uses the secondary sources of data and information. It means the research contains references from some published books, articles, specialists’ talks, the Internet, previous research, economists’ points of view and newspapers, news, etc… Moreover, there are also information and data coming from World Federation of Exchanges annual report and The Bank for International Settlements statistics. The data is useful to analyze the current situation of the financial derivatives market in Vietnam, compared to other countries in region, and then give some international experiences for Vietnam.
Tran Thi Giang 3 15A7510048 Faculty of Foreign Languages Banking Academy CHAPTER 2: LITERATURE REVIEW 2.1 An overview of derivative securities 2.1 A brief history of derivatives and derivatives markets The derivatives were derived from medieval times to meet a demand for insuring agricultural products’ prices. The history of derivatives provides evidence that an option-type agreement known as a precursor of an options contract was launched around the 6th century B. The first official exchange for trading contracts as forward delivery, the Royal Exchange (which later became the London Commodity Exchange), was formed in 1570. This was a place where metal traders could come together.
A formal futures exchange occurred in the late 17th century in the Japanese rice markets. Then, the Chicago Board of Trade (CBOT) was established in 1848 to bring farmers and merchants together, while the first forward contract in the United States was traded in 1851. After that, the New York Cotton Exchange and the New York Coffee Exchange were set up in 1870 and in 1885, respectively. The development of modern derivatives markets The first futures contracts were traded on the Chicago Mercantile Exchange (CME) in 1972.
Like futures, options have proved to be very popular contracts. The Chicago Board Options Exchange (CBOE) began trading call option contracts on 16 stocks in 1973, followed by appearance of put option contracts on the exchange in 1977. The first swap agreements were executed by the Salomon Brothers in London in 1986, while equity derivatives based on underlying stock indices began to emerge in the late 1980s. In 2007, the CBOT and the CME merged to form the CME Group.
In Tran Thi Giang 4 15A7510048 Faculty of Foreign Languages Banking Academy recent years, the derivative instruments based on a wide range of underlying assets have been traded globally.2 Definition of derivatives “The Oxford dictionary defines a derivative as something derived or obtained from another, coming from a source; not original”. (Michael Chui, “Derivatives markets, products and participants: an overview”) “In the field of financial economics, a derivative can be defined as financial instrument whose value depends on (or derives from) the values of other called as underlying assets or simply underlying. A stock option, for example, is a derivative whose value is dependent on the price of a stock”. (John Hull, “Options, Futures, and Other Derivatives” - Eighth edition) The underlying assets or original assets consist of two main types of assets as follows: real assets or commodities assets and financial assets.
The real assets include food, agricultural products, precious and industrial metals, energy products (pork bellies, live cattle, sugar, wool, lumber, copper, aluminum, gold, and tin)… There are a wide variety of financial assets; consisting of stock indices, equity derivative products, Treasury bonds, foreign currencies, exchange rates, debt, interest rates and other derivatives securities.