Improving the effectiveness of foreign currency trading activity at quang trung branch, bank for investment and development of vietnam (bidv

ADVANCED EDUCATIONAL PROGRAM ---šœ---BACHELOR’S THESIS IN FINANCE IMPROVING THE EFFECTIVENESS OF FOREIGN CURRENCY TRADING ACTIVITY AT QUANG TRUNG BRANCH, BANK FOR INVESTMENT AND DEVELOPM

ADVANCED EDUCATIONAL PROGRAM

-šœ -BACHELOR’S THESIS IN FINANCE

IMPROVING THE EFFECTIVENESS OF FOREIGN CURRENCY TRADING ACTIVITY AT QUANG TRUNG BRANCH, BANK FOR INVESTMENT AND DEVELOPMENT OF VIETNAM (BIDV)

Đề án Kinh tế quốc tế

Last but not least, I would like to thank my family for continuous and unconditional encouragement and all my classmates from Advanced Finance Program Intake 50 for their assistance that help me accomplish this research.

I am sure there exist faults in this paper All suggestions and discussions are warmly welcomed.

Đề án Kinh tế quốc tế

Today, in the trend of opening, integrated economy, business operation of thebanks has reached out across the regional and international scope Commercial banks nowhave the tendency to expand their business into many new modern banking operations inthe market Along with traditional operations, foreign exchange business has beenconsidered as a potential activity-diversifying source of income, generating profit andcontributing to the growth of the banks

In its integration of global economy, the Vietnam foreign exchange market hasbeen establishing and improving to meet the development of the country Even though inits infancy, the Vietnam foreign exchange market have been doing very well every hour,every day, and attracted the attention of many investors The products and services on theforeign exchange market have also been gradually establishing and improving in bothquantity and quality to meet the diverse needs of investors

This paper, choosing Quang Trung branch, Bank for Investment and Development

of Vietnam (BIDV) as the sample, investigates its effectiveness in trading foreigncurrency The author first goes through the theoretical foundation of the foreign currencytrading activity and effectiveness of foreign currency trading activity of commercial banks

in general, then, presents a group of criteria reflecting the effectiveness as well as pointingout significant factors affecting this activity

Through the detailed analysis of foreign currency trading business at Quang Trungbranch, this thesis reveals some achievements and existing limitations In the end, thewriter proposes some feasible solutions for the branch and recommendations to theGovernment and the State Bank of Vietnam in order to enhance effectiveness of foreigncurrency trading of commercial banks.Đề án Kinh tế quốc tế

2.2.2 Fundamental activities of banks in foreign currency trading 5

2.2.3 Characteristics of foreign currency trading activity 6

2.2.4 Types of transactions in foreign currency trading activity 8

2.3 Effectiveness of foreign currency trading activity in commercial banks 14

2.3.1 Definition 14

2.3.2 Criteria reflecting the effectiveness of foreign currency trading activity of commercial banks 15

2.3.2.1 The level of customers’ satisfaction 16

2.3.2.2 Total trading volume 16Đề án Kinh tế quốc tế

2.3.2.4 The liquidity of currencies 17

2.3.2.5 A completion of forex products 18

2.3.3 Factors affecting the effectiveness of foreign currencies trading activity of commercial banks 18

2.3.3.1. Internal factors (Subjective factors) 18

2.3.3.2. External factors (Objective factors) 21

CHAPTER III: FOREIGN CURRENCY TRADING ACTIVITIES AT

QUANG TRUNG BRANCH – CURRENT SITUATIONS AND SOLUTIONS

26

3.1 Overview of Quang Trung branch, BIDV 26

3.1.1 Establishment and development process 26

3.1.2 Scope of business activities 27

3.2 Current situation of foreign exchange trading activity at Quang Trung branch 40

3.2.1 Legal framework regulating foreign currency trading activity of Quang Trung branch

……… 40

3.2.2 Current situation of foreign currency trading 42

3.2.3 Assessment the effectiveness of foreign currency trading activity at Quang Trung branch… 50

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OF FOREIGN CURRENCY TRADING ACTIVITY AT QUANG TRUNG BRANCH 55

4.1 Orientation to improve the foreign currency trading activity 55

4.2 Recommendation for the Government 56

4.2.1 Create a favorable environment for the development of foreign exchange

market…… 57

4.2.2 Improve the international balance of payment 57

4.3 Recommendation for SBV 59

4.3.1 Implement a flexible foreign exchange rate policy 59

4.3.2 Increase the national foreign reserve 60

4.3.3 Revive the foreign exchange proprietary 60

4.3.4 Supplement and complete the regulations on the punishments of violations

62

4.4 Solutions for Quang Trung branch 62

4.4.1 Strongly develop the human factor 62

4.4.1.1 Plan recruitment and selecting process 63

4.4.1.2 Have employee retention program 63

4.4.1.3 Training and developing employees 63

4.4.2 Build a sound and effective customer strategy 64

4.4.3 Develop the derivative products 65

4.4.4 Diversify currencies in foreign exchange activities 66

REFERENCES 69

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Dept Department

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Table 1.1: Growth in mobilizing capital 34

Table 1.2: Bad debt ratio 37

Table 1.3: Structure of outstanding loans 38

Table 1.4: Business performance 38

Table 1.5: Trading volume and structure 44

Table 1.6: Structure of buying foreign currency by types of customers 46

Table 1.7: Structure of selling foreign currency by types of customers 46

Table 1.8: Operational result of foreign currency trading activity 51

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Figure 1.1: Organizational structure 32

Figure 1.2: Growth in total outstanding loans 36

Figure 1.3: Growth in pre-tax profit 39

Figure 1.4: Provisions for credit losses of 8 selected banks in 2011 40

Figure 1.5: Structure of buying activities by types of operations 41

Figure 1.6: Structure of selling activities by types of operations 50

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CHAPTER I: INTRODUCTION 1.1 Rationale

Undoubtedly, after the adhesion into World Trade Organization (WTO) ofVietnam in 2007, foreign trade activities of our country has prospered This makes theforeign currency market more active and attractive to banking sector Nevertheless,besides getting benefit from this development, banks are also exposed to more challenges.They now have to bear the severe competition not only from other domestic commercialbanks but also from foreign banks operating in Vietnam Moreover, like other businessactivities, foreign currency trading also contains potential risks that may cause largelosses if the bank has no preventive measures and proper management

Recognizing the opportunity and potential of trading foreign currency, QuangTrung branch of Bank for Investment and Development of Vietnam (BIDV) has graduallyparticipated and developed in this business field and gained worthy results Annually, theforeign currency trading activity has contributed a large profit as well as ensures theforeign currency position for the branch However, there still exist some limitations due tointernal factors of the branch itself and other elements in the business environment

With the aim of improving the effectiveness in trading foreign currency at QuangTrung branch, I selected research topic: “Improving foreign currency trading activity atQuang Trung branch, Bank for Investment and Development of Vietnam (BIDV) - currentsituation and solutions”

1.2 Research questions:

This paper is carried out with the aims to answer three following questions:

- What is the current situation of foreign currency trading activity at Quang Trung branch? Đề án Kinh tế quốc tế

- What are the existing problems of Quang Trung branch in trading foreign currency?

- What are solutions should be taken to overcome these existing problems and to improve the effectiveness of foreign currency trading activity at Quang Trung branch?

1.3 Research objectives

The objective of this research is:

- To revise the theories on foreign exchange trading activity of commercial banks

- Based on the theories, analyze the current situation of Quang Trung branch andevaluate its effectiveness in trading foreign currency

- To find and propose some solutions and recommendations for enhancing theeffectiveness of foreign currency trading of commercial banks and in Quang Trungbranch

1.4 Research methodology

Primary data in this thesis was collected through observing the foreign currencytrading activity of the Quang Trung branch’ staff and personally talk with the officers inthe Planning department Secondary data was extracted from annual reports of the branchand statistics from the Planning department about the foreign currency trading operation.Together with data downloaded from official website of SBV, BIDV, and informationfrom related sources: books, magazines, and websites

The data was presented and displayed through graphs, figures and tables.Additionally, the writer used analytical technique as the main method in processing thedata, combined with comparison and synthetic approach to solve problems, then reachedthe comments, assessments, and recommendations

1.5 Research scope Đề án Kinh tế quốc tế

Since the foreign exchange business in the banking is a very large area involvingmobilizing fund, making loans, buying and selling foreign currencies and internationalpayment, this paper mainly concentrates on the activity of buying and selling foreigncurrencies of the branch or in other words, foreign currency trading This activity isundertaken not only for serving the customers’ needs of foreign currency but also for thebranch to earn profit as well

The research focuses on the performance of foreign currency trading at QuangTrung branch in the period 2007 -2011

1.6 Structure

This paper is organized into three main parts: Introduction, Body and Conclusion.The structure of the Body will be constructed consistently with three research questions:Chapter 1: Theory of foreign currency trading activity and effectiveness of foreigncurrency trading activity of commercial banks

Chapter 2: Current situation of foreign currency trading activity at Quang Trungbranch

Chapter 3: Recommendations to improving the effectiveness of foreign currencytrading activity at Quang Trung branch

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CHAPTER II: THEORY OF FOREIGN CURRENCY TRADING ACTIVITY AND EFFECTIVENESS OF FOREIGN CURRENCY

TRADING ACTIVITY OF COMMERCIAL BANKS

2.2 Overview of foreign currency trading activity of commercial banks

2.2.1 Definition

Before we penetrate deep into the foreign currency trading activity of commercialbanks, let’s have a brief look at the definition of currency trading in general to answer theinitial question: What is currency trading? Generally, currency trading, as defined by the

InvestorWorlds.com, is “the process of investing in world currencies It involves buying and selling currencies to take advantage of variations in exchange rate.”

Trading foreign currency of commercial banks, in the broad sense, including theact of buying and selling, borrowing and lending of different currencies, in order to ensurebalance of trade in foreign currency accounts for the bank and seek to earn profit throughthe difference in exchange rates and interest rates between different currencies

In narrow sense, currency trading is simply buying and selling foreign currency ofcommercial banks when they participate in domestic and foreign market to ensure thecustomers’ demands of foreign currency, and bring profits for themselves

It is certainly in the past that currency trading was just for the banks, and thesmaller investors have been unable to access to this kind of market However, thanks tothe immense advances in technology, the new revolution of electronic economy, and therise of online forex trading, Forex market has been opened to all individual investorsaround the world Surely, today if anyone has a computer and internet connection caneasily start to trade currencies, but since Forex is rightly known as a volatile and high-risktype of securities trading, the experience and expertise are very important to success in

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forex market For this reason, foreign currency trading is mostly engaged by banks andother institutions.

2.2.2 Fundamental activities of banks in foreign currency trading

In the foreign exchange market, commercial banks participate by buying andselling foreign currency for their retail clients and also carry out their own foreignexchange transactions

Fundamentally, a bank’s foreign currency position reflects three followingactivities:

1 The purchase and sale of foreign currencies with counterparties/customers tosatisfy counterparties/customers’ demands;

2 The purchase and sale of foreign currencies for hedging purposes to offsetexposure in any given currency;

3 The purchase and sale of foreign currencies for speculative purposes throughthe difference in exchange rate of different currencies

Apart from normal banks, central banks also participate in the foreign exchangemarket to regulate currencies in protection of their economy Central banks or andnational banks serve a dominant role in controlling inflation, interest rates and moneysupply Since a country's currency rates have direct implications on it's economy throughthe trade balance, almost all central banks tend to intervene to influence the value of theircurrencies This is known as managed float

Central banks can determine foreign exchange rates to a certain extent, as theyhave huge foreign exchange reserves in hand to stabilize the market Again, this does notalways work as the combined resources in the actual market usually have a bigger say Ashighlighted by William P Osterberg in his article 'Why Intervention Rarely Works' inyear 2000, "foreign-exchange-market intervention is generally ineffective whenĐề án Kinh tế quốc tế

undertaken independent of monetary policy." An example of central banks' limitations areevident in the 1997 Southeast Asia economic crisis when the International Monetary Fund(IMF) failed to prevent currency depreciation.

2.2.3 Characteristics of foreign currency trading activity

Firstly, foreign currency trading activity is tied to the exchange rate Foreign

exchange rate reflect the movement and fluctuations in the value of foreign currencies.Consequently, in order to implement these activities successfully, one needs to follow upthe exchange rate variation on the foreign exchange market

Secondly, foreign currency trading is a highly liquid activity With the unique

features of foreign exchange market: huge trading volume, geographical dispersion,continuous operation: open 24 hours a day, five day a week, and the use of leverage toenhance profit and loss margins, making the foreign exchange market in general andcurrency trading market in particular, is the largest, most liquid financial market in theworld in term of the total cash value traded and includes all of the currencies in the world.Traders include large banks, central banks, institutional investors, currency speculators,corporations, governments, other financial institutions, and retail investors According tothe 2010 Triennial Central Bank survey, coordinated by the Bank for InternationalSettlements, average daily turnover in the global foreign exchange market was US$3.98trillion in April 2010

Thirdly, foreign currency trading is a hazardous and chancy business that contains

high level of risks and uncertainty Two major types of risk that foreign currency tradingactivity of commercial banks is often exposed to are exchange rate risk and interest raterisk

+ Exchange rate risk: is the overwhelming majority of the risk facing by the bank

in its foreign currency trading activity Foreign exchange risk arises when a bank holdsassets or liabilities in foreign currencies and impacts the earnings and capital of bank dueĐề án Kinh tế quốc tế

to the fluctuations in the exchange rates When a given currency appreciates in value tothe domestic currency, the bank would be beneficial if the bank are in the stage of netlong in that currency and vice versa it would suffer loss if the value of that currencydepreciates to the domestic currency No one can predict what the exchange rate will be inthe next period, it can move in either upward or downward direction regardless of whatthe estimates and predictions were This uncertain movement poses a threat to theearnings and capital of bank, if such a movement is in undesired and unanticipateddirection Since the exchange rate constantly changes, banks always face risks due toexchange rate fluctuations.

+ Interest rate risk: interest rate risk refers to the uncertainty associated with theinterest rates of assets denominated in different currencies Since the change in interestrate of one currency will have an effect on the exchange rate, it also exposes the bank tothreats as well Investors buy currencies with higher interest rates and sell currencies withlower rates, pursuing higher yields Interest rates largely depend on the central bank'sshort-term interest rates, which commercial banks use as a benchmark for setting theirown rates

Besides, there are several different risks involved in foreign currency tradingactivity such as liquidity risk, settlement risk, sovereign risk, but such risks are lessmeaningful and less severe than the two risks above

Fourthly, foreign currency trading is a complex and intricate business In today’s

modern and increasingly competitive economy, every business is risk vulnerability.Especially one in banking-related activities, losses can be very rigorous and non-infrequent To succeed in foreign currency trading requires a perfect information systemwith ample facilities and modern equipments Traders must have a throughout grasp oftheoretical background to understand the financial terms and concepts and analyze signalsand indicators in the forex market Moreover, they also must have sufficient expertise inmany areas, trading skill, qualified management, technical capacities With the constantĐề án Kinh tế quốc tế

change and evolution of the market, the ability and experience to capture the market in aflexible way as well as to determine what happens in the market and predict what could

be happen in the future has been considered as the key deciding the success or failure ofthe foreign currency traders

2.2.4 Types of transactions in foreign currency trading activity

Spot transaction:

Spot foreign exchange transaction is the transaction between two counterpartiesthat involve the immediate exchange of currencies at the current (or spot) exchange rateand the settlement date (effective date), normally, two working days from the trade date

The spot market is the largest and the most actively traded of the foreign exchangemarket, with a huge amount of dealing volume and a fast transaction speed to takeadvantage of difference in exchange rate Correspondingly, spot transaction is animportant and typical type of transaction in the foreign exchange market, accounting for43% of the total transactions in the world and as the basis for other transactions InVietnam today, this transaction makes up more than 90% of foreign exchange tradingvolume

Settlement date: the standard timeframe for the delivery and payment of foreign

exchange spot transaction is Normally, the settlement day is T+2 days; which means onthe second following business day from the transaction time However, there is a notableexception in the settlement date, which settles at T+1 Indeed, it is a foreign exchangetrading strategy that seeks to avoid actual delivery of a currency by closing positions atthe daily close rate and re-entering at the new opening rate the next trading day Also

referred to as “tomorrow next” rate

Tomorrow-next trades arise because most currency traders are speculatorsand have no intention of taking delivery of the currency If a trader buys and closesĐề án Kinh tế quốc tế

out his or her currency position the same business day, there isn't a problem withdelivery But traders who wish to hold their position over the current business day andhave no intention of accepting delivery of the currency would use tomorrow-nextprocedures: the position is closed out that business day at a closing rate, and then theposition is re-established the following day This allows the trader to hold the position forthat day without worrying about delivery

Forward transaction:

A forward foreign exchange transaction is the exchange of currencies at anexchange rate agreed today for delivery on a specified future date This is in contrast to aspot contract, which is an agreement to purchase or sell a set amount of foreign currencytoday An example is an agreement today (time 0) to exchange dollars for pounds at agiven exchange rate three months into the future

Figure 1.1: Spot versus Forward foreign exchange transaction

Spot foreign exchange transaction:

Forward foreign exchange transaction:

Exchange rate Agreed

between Buyer and Seller

Exchange rate agreed between +

Buyer and Seller

Currency delivered by Seller to Buyer

Buyer pays forward price for currency Seller delivers currency

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As a tool for risk hedging, an forward exchange contract help investors manage therisk inherent in currency markets by predetermining the rate on which they will purchase

or sell a given amount of foreign currency, regardless of the movement in the exchangerate in forex market, thereby protecting against exchange rate risk Forward contracts aretypically written for one-, three-, or six-month periods, but in practice they can be writtenover any length of time

Forward rate: the forward rate is calculated by adjusting the current market rate

(the spot rate) for “forward points”, which take into account the difference in interest ratesbetween the two currencies and the time to maturity The formula to determine theforward rate is as followed:

Forward rate = Spot rate + (-) Forward pointwhere:

Forward point = (Spot rate * Difference of interest rate * number of forwarddays)/360*100

* Interest rate parity:

The reason why the forward exchange rate is different from the current exchangerate is because the interest rates in the countries of the respective currencies is usuallydifferent, thus, the future value of an equivalent amount of two currencies will grow atdifferent rates in their country of issue The forward exchange rate equalizes thedifference in interest rates of the two countries Thus, the forward exchange rate

maintains interest rate parity.

Since currency in the country with higher interest rate will grow faster and becauseinterest rate parity must be maintained, it follows that the currency with a higher interestrate will trade at a discount in the FX forward market, and vice versa So, if the currencyĐề án Kinh tế quốc tế

is at a discount in the forward market, then forward points are subtracted from the spotrate; otherwise the currency is trading at a premium in the forward market, points areadded.

Futures transaction:

Fundamentally, forward and futures contracts are closely related They have thesame function: both types of contracts allow people to buy or sell a specific type of asset

at a specific time at a given price

However, they also differ in certain respects First of all, futures contracts are

exchange-traded and, therefore, are standardized contracts and are traded on organized exchanges Forward contracts, on the other hand, are individually negotiated,trading over the counter (OTC) and are not as rigid in their stated terms and conditions.Because forward contracts are private agreements, there is always a chance that a partymay default on its side of the agreement Futures contracts have clearing houses thatguarantee the transactions, which drastically lowers the probability of default to almostnever

Secondly, the specific details concerning settlement and delivery are quite distinct.For forward contracts, settlement of the contract occurs at the end of the contract Futurescontracts are marked-to-market daily, which means that daily changes are settled day byday until the end of the contract Furthermore, settlement for futures contracts can occurover a range of dates Forward contracts, on the other hand, only possess one settlementdate

Lastly, because futures contracts are quite frequently employed by speculators,

who bet on the direction in which an asset's price will move, they are usually closed out prior to maturity and delivery usually never happens On the other hand, forward

contracts are mostly used by hedgers that want to eliminate the volatility of an asset'sprice, and delivery of the asset or Đề án Kinh tế quốc tếcash settlement will usually take place

Swap transaction:

A foreign exchange swap is a simultaneous purchase and sale of identical amount

of one currency for another with two different value dates (normally spot to forward)

A foreign exchange swap contract has the following characteristics:

+ Contracts to buy and sell a given currency were signed simultaneously at a giventime;

+ The quantity of buying and selling this currency is equal;

+ The value dates of bought and sold contract are different

The day of execution of the first deal is called a value date and the day of execution of the second and reverse one (detached in time) is called a swap end date.

Through the features above, we find that:

+ Currency swap transactions effectively in no net exposure in foreign currencybut they do create the difference in terms of time of the cash flow

+ Currency swap transaction consists of two types:

A/ One spot + one forward transaction (Spot-Forward Swap) For example:

Buy (sell) USD spot Sell (buy) USD forward

B/ Both two transactions are forward (Forward-Forward Swap)

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Signing Buy (sell) USD Sell (buy)

contract Forward Forward

F1 contract F2 contract

Unlike the spot or forward contract, the banks operate only in one way to servetheir customers, meaning that banks buy or sell a certain amount of foreign currency atspot or forward rate without simultaneous agreement with customers a reverse transaction

to sell or buy Therefore, banks can not guarantee the balance of its foreign currencyposition immediately after the transaction, foreign currency swap can overcome suchdrawback due to the amount of currencies purchased and sold are always equal

Option transaction:

A foreign exchange option is a derivative financial instrument that provides theowner with the right, not the obligation, to buy or sell a specified amount of an underlyingcurrency at an agree upon exchange rate (the strike rate) on or before a specific futuredate (the expiration date) If the owner decides to exercise his/her right, the seller has theobligation to execute that right

In exchange for buying this right, the client must have to pay an upfront fee,known as the option premium, to the bank

There are two types of option:

+ Call option: give the buyer the right to buy the underlying currency

+ Put option: give the buyer the right to sell the underlying currency

Two styles of option:

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+ European style option: option may be exercised on the expiration date of the

option only

+ American style option: option may be exercised at any time up to and including

the expiration date

Similar to other instruments, foreign exchange option contract is commonly used

to hedge foreign exchange rate risk in the market Since it allows the buying and selling offoreign currencies at a predetermined exchange rate, it helps to protect foreign currencyexposures against adverse exchange rate movements

In addition, an option can be regarded as a form of insurance from uncertain losses

or profit From the buyers’ perspective, the maximum potential losses they can incur islimited and equal the cost of premium and the profit they can earn is unlimited.Conversely, from the sellers’ perspective, they may have to incur unlimited losses andearn only a limited profit is the premium

Moreover, an option contract is also used for speculative purposes Because thebuyer has the right to execute transaction if found beneficial for them and do not executethe transaction if found unfavorable exchange rate, this making the option contract faroutweigh other derivative instruments

2.3 Effectiveness of foreign currency trading activity in commercial banks 2.3.1 Definition

In order to improve the effectiveness of banks’ foreign currency trading activity, it

is necessary to clearly clarify and understand the meaning of the term “effectiveness”

Effectiveness, as define in the Oxford Advanced Learner’s dictionary, means producing

the result that is wanted or intended

From the Wikipedia source, “effectiveness is the capacity of producing a desired result”.Đề án Kinh tế quốc tế

 Effectiveness versus Efficiency

In any business, effectiveness and efficiency are two concepts closely related andtypically go hand in hand They are so important factors to management that anymanagerial position must strive to achieve if they want to improve their performance.However, because of the similarity and correlation between these two concepts, manypeople misunderstand and taking for that they are interchangeable or even synonym Arethey really interchangeable or taking on different meaning?

A very popular and well-known way to look at them is that: efficiency is doingthings right, and effectiveness is doing the right things Efficiency refers to getting themost output from the least amount of inputs Because managers deal with scare inputs-including resources such as people, time, money and equipment- they are concerned withthe efficient use of those resources For that reason, it is often referred to as “doing thingsright”, that is, not wasting resources

It is not enough, however, just to be efficient Management is also concerned withbeing effective, completing activities so that organizational goals are attained.Effectiveness is often described as “doing the right things”, that is doing those workactivities that will help the organization reach its goals

To summary, whereas efficiency is concerned with the means of getting thing done, effectiveness is concerned with the ends, or attainment of organizational goals

From all things considered, we can understand the effectiveness of foreigncurrency trading activity of commercial bank is the ability of the bank in producingresults and outcomes in accordance and conformity with the orientations and the goalsthey develop for this activity

2.3.2 Criteria reflecting the effectiveness of foreign currency trading activity

of commercial banks Đề án Kinh tế quốc tế

2.3.2.1 The level of customers’ satisfaction

At the first glance, foreign currency trading activity of commercial banks is aservice developed to satisfy the customers’ needs of foreign currency

Such needs are variably deserve They can vary from payment for goods andservices for their foreign trade contracts, for going on oversea business, studying,travelling abroad or buying foreign currencies for the purpose of profits For this reason,the effectiveness of foreign currency trading activity of commercial banks is consideringwhether banks have capacity to adequately provide the amount of foreign currencies when

a customer have reasonable demand to buy as well as the ability to completely buy agiven amount of foreign currencies when he/she wishes to sell The more promptly thebank can meet their customers’ demand, the more satisfaction level of their customers Inaddition, criteria such as simplicity of procedure, timely and accuracy of forex transactionare also important factors contributing to the satisfaction of customers Therefore, foreignexchange trading activity creates conditions and opportunities for banks to expand itsoperational network, diversify its customers base, and enhance its prestige and position inthe market

2.3.2.2 Total trading volume

The next criterion needs to be taken into consideration is the volume of foreign

currency trading Volume here can be interpreted as the quantity of foreign currency

bought and sold that occurs daily, quarterly or annually

The criterion about trading volume of foreign currency reflects the size andcapacity of the bank Normally, the more and more transactions are conducted, the highersource of foreign currency available and ability of the bank to meet the demand ofcustomers However, it is of great importance to consider the time frame and the factor ofexchange rate and interest rate at that time For example, if the exchange rate on the forexmarket has the tendency of going down, the banks with excess foreign currency will beĐề án Kinh tế quốc tế

exposure to foreign exchange rate risk, which is a potential of loss Moreover, the tradingvolume of the bank needs to be adjusted so that the bank’s foreign currency position is inthe safe level If the buying volume decreases, banks will proactively reduce the amount

of foreign currency sold out and vice versa in order to keep the safety of their foreigncurrency position

2.3.2.3 Profitability of foreign currency trading

The foremost and ultimate goal of any commercial activity is profit, and foreignexchange trading is not outside of that cardinal principle

A large part of foreign exchange turnover is from banks Large banks can literallytrade millions of dollars daily Profits derive from two main sources: the services to theircustomers and they themselves speculate on the FX market When banks act as an agentproviding services to their customers, they gain revenue in the form of transaction fees.However, profits from foreign currency trading activity of banks primely come from thelater activity, which is speculation by buying and selling currencies A bank that wishes tobuy or sell currency directly will offer bid/ask price and earn the profit by the spreadbetween the bid and the ask price

2.3.2.4 The liquidity of currencies

A foreign currencies’ liquidity is the ability at which it can easily be bought orsold in the Forex market without affecting its price It is the benchmark of interest intrading currencies at any given moment

For foreign exchange trading activities, the indicator of liquidity is the mostimportant criterion to evaluate the performance as well as effectiveness of foreignexchange business of banks

The foreign exchange market is often described as the world's most liquid financialmarket, and that's true But it doesn't mean that currencies aren't subject to varyingĐề án Kinh tế quốc tế

liquidity conditions that currency traders need to keep in mind When there are greatfluctuations towards negative exchange rate of some currencies in the currency portfolio,those currencies would yield low liquidity, thus exerting bad influence on the capital ofthe banks.

2.3.2.5 A completion of forex products

In the foreign currency trading activity, derivative products can also be a measure

of effectiveness A diverse and complete foreign exchange system with various types ofproducts and operations certainly allow the banks to provide safe and guaranteed service

to clients, thus serving their clients better More importantly, derivative transactions alsoact as an insurance for the banks themselves

Among different type of foreign exchange risks that banks encounter, exchangerate risk could expose banks to very significant and severe losses if there are highvolatility in forex market It is, therefore, necessary to look into measurement to limitexchange rate risk vulnerability By using different foreign exchange operations, bankscan always limit to a lowest level the risk from exchange rate fluctuation, which providingbusiness effectiveness and safety as well as ensuring net foreign currency exposure

2.3.3 Factors affecting the effectiveness of foreign currencies trading activity

of commercial banks

2.3.3.1 Internal factors (Subjective factors)

 Capacity of the bank

Foreign currencies trading activity requires a comprehensive investment in bothhuman and technology resources

In the banking activity, human resource always keeps the most important role andposition However, in forex market, a qualified and professional staff is the key directlydeciding the profitability and success of foreign trading activity As employees working inĐề án Kinh tế quốc tế

the foreign currencies area, they must have a thorough grasp of concepts and terms inforeign market, must be equipped with necessary skills such as technological skills totransfer and interpret data, advisory skills to provide expert advice to their clients, and theagile and flexible responsiveness in implementing foreign exchange transactions.

Moreover, this activity is very complex since facing with many risks, especiallyforeign exchange risk Foreign exchange fluctuates and changes hourly, thus requiring thedealers to keep track of the market But just to watch the market is not enough andadequate, they also must be able to give commend and analysis on the trend of exchangerate in the future to make profit for the banks Therefore, in addition to qualifications andprofessional knowledge, foreign currencies trading staff also serve as market analysts.Their analysis and decisions can bring huge benefits as well as sizable damage for thebanks

Facilities also play an important role because without the support from equipment,humans can not complete their tasks especially for a complicated activity like foreigncurrencies trading In order to carry out foreign exchange business, each bank must have asystem to automatically process information and transaction Thanks to this system, thedealers can capture the situations, movements in the foreign market, monitor the constantchanges of international exchange rates, and make decisions regarding to suchinformation Today, with the great progress and advances in technology, it is widelyapplied in many aspects of daily lives especially in the banking area So, there is an urgentrequirement that bank must be equipped with sufficient and modern technological system

to facilitate the foreign currency transactions

To sum up, humans and facilities go hand in hand in deciding the success offoreign currencies trading activity of every bank Lacking properly concern of either onefactor will also largely affect the effectiveness of this activity and expose the bank tosizable losses

Đề án Kinh tế quốc tế

 Procedure of forex transaction

A very important factor affecting the development and effectiveness of foreigncurrency trading activity in commercial banks is trading procedure Procedure here are therules and policies that the banks develop on their own besides regulations of the state law

A prompt, accurate and precise procedure which is consistent with the specific condition

of each bank and the development of the forex market will act as a platform boosting thesuccess of foreign currency trading activity

 Risk management

In foreign currency trading activity, one must make decision and each decisionalways accompanies with risk Among different types of risk, exchange rate risk isregarded the biggest risk that usually brings very severe loss for any participant In order

to succeed in this area, the bank seeks not only to avoid risk, but also to find the way tocontrol it

Normally, the task of managing risk belongs to the Treasure department of a bank and it isorganized into three main divisions:

+ Front Office (FO): the front office is literally the bank’s interface with the market Here

is buying and selling takes place and is usually considered a profit center

The front office consists of two major positions: dealers who will directly deal withcustomers and list the daily exchange rate The traders are primarily responsible for theforeign currency position of banks and are also taking charge of trading in forex

+ Middle office (MO:) located very close to the front office, but don’t engage in market

activities themselves Instead, they act as an intermediate part to coordinate with frontoffice and back office staff to examine, monitor and control risk in foreign exchangetrading

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+ Back office (BO): monitors the post-market processing of transactions: confirmation,

payment, settlement and accounting.

2.3.3.2 External factors (Objective factors)

 Foreign exchange rate

There is no doubt that foreign exchange rate is the most concerning indicator in theforex market and any participant involved in this market must have to care about it Also,foreign currencies trading activity is stuck to the foreign exchange rate Foreign exchangerate can be considered as the principal factor directly influence on the foreign currenciestrading activity of the banks For instance, if exchange rate tends to increase (foreigncurrency appreciates against domestic currency), the supply of foreign currencies will beless than the demand because anyone wants to purchase soon and those who have surplusforeign currencies do not want to sell early, thus the buying activity of foreign currenciesrun into difficulties But, when the exchange rate fluctuate conversely (foreign currencydepreciates against domestic currency) the buying activity is facilitated meanwhile theselling activity is in trouble

However, the fluctuation in exchange rate is caused and driven by many factorssuch as GDP growth of the country, differentials in inflation, differentials in interest rates,trade balance, the world economic situation and the exchange rate policy of the country

So, forecasting exchange rate becomes vital to the success of the bank’ foreign currenciestrading activity Currently, there are two pure approaches to forecast foreign exchangerate: the fundamental approach and the technical approach Fundamental analysis involvesstudying of the economic situation of the world and region to trade currencies moreeffectively Technical analysis takes a different approach; it involving studying thehistorical price movements and supply and demand in the market in an attempt todetermine what direction, or trend, will continue in the future Since explanation andinterpretation of these two approaches are very complicated and quite technical, they gobeyond the scope of this thesis and are not mentioned here

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 The development of foreign exchange market

Though currency trading is the most liquid activity with a huge amount of

currencies volume traded everyday, there is no mean that it does not need to have anenvironment and market to develop The more developed the market is, the moresuccessful and prosperous currencies trading activity is With an undeveloped foreignexchange market, currencies trading activity is only primitive with few foreign exchangeoperations and services, and sometimes are forms that do not bring in business efficiency

The development of foreign market does not lie only under the maturity andhistory of the market but also under the knowledge and education level of residents Themore educated and knowledgeable people allow banks and institutions to diversify andexpand their business operations and derivative products Competitiveness is also anindicator reflecting the development of the market A developed market with a largenumber of banks engaging in the foreign currency trading will create a perfectlycompetitive environment and force them to find measures and solutions to improve andbetter themselves

 Foreign exchange management policies of the government

The foreign exchange management policies of a nation are regulations andstipulations of the government in monitoring the use of foreign currencies, preciousmetals and stones, and valuable papers denominated in foreign currencies for the purpose

of exchange, purchase and selling in the domestic market as well as internationalpayments

Certainly, foreign exchange management policies have strong impacts on thedevelopment of the foreign exchange market and foreign currencies trading activity ofbaking system However, the extent to which the application of foreign exchangemanagement regime is strict closely depends on the condition and context of each nation

A properly composed and executed foreign exchange policy will positively affect theĐề án Kinh tế quốc tế

forex market, which leading to the growth of foreign currencies trading In contrast, arigid and unreasonable policy can become an obstacle and barrier that strangling theforeign currencies trading and hindering the development of forex market Moreover, anappropriate exchange rate regime is another factor needs to be carefully cornered by anation A volatile and unstable exchange rate will significantly influence on the economyand forex business of banking sector, by contrast, a fixed and permanent exchange rate is

a hindrance for the growth and development of this activity Therefore, the governmenthas always strived to find and take measures to have a suitable and flexible exchange ratepolicy which not only ensures stability but encourages foreign exchange trading of theeconomy

In Vietnam, the foreign exchange business of banks is strictly regulated andcontrolled by foreign exchange decrees promulgated by the State bank of Vietnam Theaims of these decrees is to create favorable conditions and ensure the legitimate interests

of organizations and individuals engaged in foreign exchange, making contribution to theeconomic development, performs the target of the national monetary policy, to improvethe convertibility of Vietnamese dong In addition to this, the State of Vietnam alsoapplies a wide range of tools and measures to adjust and stabilize the foreign exchangemarket through exchange rate, currency exchange margin rate, foreign currency position,and the reserve requirement

 The economic, political conditions and market psychology

Those engaged in foreign currencies trading must be aware of factors that changeand determine the value of the currencies on the market, aside from typical market forces

of supply and demand These elements generally fall into three categories: economicfactors, political conditions and market psychology

 Economic conditions include the following:

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 Inflation: This has a major effect on the forex trading Characteristically, the higher

or growing inflation leads to the lost of the value by the nation’s currency Thishappens due to the fact that inflation destroys and erodes the purchasing power andthe demand for that currency consequently

 Government budget deficit or surplus: It is very important to maintain the fiscalsolvency that is the indicator of general financial health of the country Presenting

a good budget is no easy task for the politicians The surplus or deficit that happens

to be the outcome of the budget becomes the determining factor of the value ofcurrencies in forex market The market usually reacts negatively to wideninggovernment budget deficits, and positively to narrowing budget deficits Theimpact is reflected in the value of a country's currency If the budget shows asurplus then there will be a considerable increase in the value of the nationcurrency and a deficit will make the value of the currency a question

 Balance of trade levels and trends: the higher a nation’s trade levels, the higherdemand will be for its currency to perform these trades, thus increasing thecurrency’ value

 Economic figures and reports: Data provided in reports such as GDP (grossdomestic products), unemployment and employment levels, sales of goods, offerinsight into a nation’ economic growth and health Commonly, the more healthycountry’s economy, the better its currency will perform, resulting in a higherdemand for it

 Political conditions

National and international political events and conditions can have a significanteffect on regional currency market, as well as the forex market as the whole As would beexpected, times of political turmoil and instability can have a negative impact on anation’s economy On the other hand, if the political condition is strengthened, favorableeconomic and trading conditions may result.Đề án Kinh tế quốc tế

perceived as stronger over their relatively weaker counterparts The U.S

dollar, Swiss franc and gold have been traditional safe havens during times of political or economic uncertainty

 Long-term trends: Although currencies do not have clear growth trends like stocks and commodities, they do often move in visible long-term trends Cyclical trend analysis looks at longer-term price trends that may rise from economic or political trends

 “Buy the rumor, sell the fact”: Rumors also play a large role in Forex currencytrading and some may feel inclined to buy and sell on such rumors The price ofthe currency usually reflects the possible affect of this or that event before it hashappened, so the matter is that react is in exactly the opposite direction as soon asthis event has already occurred This may also be referred to as a market being

"oversold" or "overbought"

 Economic numbers: the economic indicators can show the condition of theeconomic policy, and some reports may have strange effect – the importance ofthis or that report grows to market psychology and may have an immediate impact

on short-term market moves Over the last years such indicators as money supply,employment, inflation, and trade balance have experienced such importance.Đề án Kinh tế quốc tế

CHAPTER III: FOREIGN CURRENCY TRADING ACTIVITIES

AT QUANG TRUNG BRANCH – CURRENT SITUATIONS AND

SOLUTIONS 3.1 Overview of Quang Trung branch, BIDV

3.1.1 Establishment and development process

According to Decision No 191/QĐ- HĐQT dated 07/04/2005 by the Board ofDirectors of BIDV, on 16/04/2005, Quang Trung branch was officially established Thisestablishment was based on the purpose of upgrading the I transaction office and wentinto operation since 31/04/2005 At that time, the branch had original assets of VND1,300 billion and a staff of 65 transferred from the Head Office and transaction office

The main function of the branch is to act as a retail banker providing bankingservices to customers ranging from individuals to small and medium enterprises, andenterprises in the process of equitization Consequently, services diverse and customersconvenience was considered its main direction The branch operated under the model of amodern bank with novel banking operation process and innovative technology, consistentwith modernization project of Vietnam’s banking system today

Especially, Quang Trung branch was the first mover in the whole system of BIDVhaving Marketing model, Security team and Development of specialized sale networksdepartment responsible for specific tasks of the branch With ceaseless efforts of thebranch officials, Quang Trung branch continuously gained title of successfully completedthe task for the branch, the staff of the branch achieved many individual titles for theircontribution and dedication for the system awarded by BIDV

2011 was the year marking the 7- year development route from the establishmentdate of the branch In the past seven years, Quang Trung has had an admirabledevelopment steps not only in the scale but also in the effectiveness and quality ofoperation From an inexperienced branch with a humble starting capital of VND 1,300Đề án Kinh tế quốc tế

billion and 65 personnel, after 7 years operating, Quang Trung branch has risen anddeveloped to become one of the leading branches in the total BIDV system Up to31/12/2011, total assets of the branch reached VND 7,530 billion, sevenfold of the initialinvested capital; total mobilized capital was 7,120 billion, total outstanding loans wasVND 6,590 billion, meet the line of credit requirement of SBV

3.1.2 Scope of business activities

Similar to other commercial banks and branches, Quang Trung branch alsoengages in traditional banking operations as mobilizing capital, providing loans tocustomers and offering payment services In addition, the branch also tries to find newproducts and methods to provide convenience and comfort for its customers and to keeppace with the rapid changes in the business environment of the society

as promissory note, short-term deposit certificate and other short term valuable papers

- Borrowing funds in the form of transferred ones from Head Office of Bank forInvestment and Development of Vietnam

- Other borrowing forms according to the rules of SBV

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- Car loan, home loan, consumption installment loan

- T-day securities loan, loan secured by the mortgage of valuable papers/certificate offixed deposit

- Unsecured overdraft

For corporations, Quang Trung branch also provides a variety of products such as:

- Corporate overdraft

- Export financing loan

- Building construction loan

- Loan for hydroelectric project

b) Discounting valuable papers

Quang Trung branch supports capital demands of the customers who havepurchased its valuable papers by buying them back in form of flexible discount (term orentire remaining term of valuable papers discount) This operation is also applied inproviding loan to corporations secured by the mortgage of valuable paper or certificate offixed deposit at which the loan or discount amount is up to 100% of value of valuablepapers or certificate of fixed deposit.Đề án Kinh tế quốc tế

c) Guaranteeing

Guaranteeing activities of Quang Trung branch involves several forms like tenderguarantee, performance guarantee, guarantee certification and many other kinds ofguaranteeing Recently, the branch has employed the new area of guarantee, which isguaranteeing the bond issuance of corporations

3.1.2.3. Offering banking services

Quang Trung branch provides complete and comprehensive services to bringconvenience and advantages to its clients:

- Automated payroll

- Automatic fund transfer

- Homebanking

- Cash collection/Payment at pre-defined location

- International payment service mostly for import, export enterprises

3.1.2.4. Other activities

Besides traditional activities as listed above, Quang Trung branch ceaselesslystriving, creative and engaged in other fields of operation in order to develop a completesystem of banking products and services accordance with the Vietnamese marketconditions For example, it is the leading branch providing insurance for the fuel price ofVietnam Airlines; in stock market, it is also the pioneer in developing partnerships andcooperative relation with securities companies so as to provide a wide range of brokerageservices, investment and investment consultant for them and other investors In addition,the branch also took part in financial investments including financial leasing, securitytrading and capital contribution, with the aim at establishing investment companies to theĐề án Kinh tế quốc tế

project.Especially, Quang Trung branch was the pilot branch in the whole system ofBIDV to deploy option contract in foreign exchange business.

3.1.3 Organizational structure

Currently, Quang Trung branch has 3 other II tier affiliated sub-branches and 5traction offices within the Ha Noi:

- Branch 1: 37B Duong Thanh , Hoan Kiem District, Ha Noi

- Branch 2 : 20 Cat Linh, Dong Da District, Ha Noi

- Branch 3 : 118 Nguyen An Ninh, Hoang Mai District, Ha Noi

About internal organizational structure, Quang Trung branch’s board ofmanagement include 1 general director, 2 deputy directors, and other managers anddeputy managers of departments which perform their tasks under monitor and regulation

of board of management

Figure 1.1: Organizational structure

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