Topic hedging services for foreign currency exchange provided by joint stock commercial bank for foreign trade of vietnam

Advantages and disadvantages of Money Market Hedging...8 CHAPTER 2: CURRENT STATUS OF FOREIGN CURRENCY RISK PREVENTION PRODUCTS AND SERVICES AT VIETCOMBANK...10 1.. Foreign currency risk

THUONG MAI UNIVERSITY

Major: Banking and finance

Subject: Multinational financial management

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TOPIC : Hedging services for foreign currency exchange provided

by Joint Stock Commercial Bank for Foreign Trade of Vietnam.

Hanoi 2024

TABLE OF CONTENT

INTRODUCTION 4

CHAPTER 1: GENERAL THEORIES ON HEDGING SERVICES FOR FOREIGN CURRENCY EXCHANGE 5

1 Definition of foreign exchange risk 5

2 Types of foreign exchange risk 5

3 Some techniques to hedge foreign exchange risk 5

3.1 Hedging by forward contracts 5

3.1.1 Definition 5

3.1.2 Characteristics of Forward Contracts 5

3.1.3 Advantages and disadvantages of Using Forward Contracts 5

3.2 Hedging by futures contracts 6

3.2.1 Definition 6

3.2.2 Characteristics of Futures Contracts 6

3.2.3 Advantages and disadvantages Using Futures Contracts 6

3.3 Hedging by currency options 7

3.3.1 Definition 7

3.3.2 Characteristics of Currency Options 7

3.3.3 Advantages and disadvantages of Using Currency Options 7

3.4 Hedging through the money market 8

3.4.1 Definition 8

3.4.2 Steps in Money Market Hedging 8

3.4.3 Advantages and disadvantages of Money Market Hedging 8

CHAPTER 2: CURRENT STATUS OF FOREIGN CURRENCY RISK PREVENTION PRODUCTS AND SERVICES AT VIETCOMBANK 10

1 Overview of Vietcombank 10

1.1 Introduction of Vietcombank 10

1.2 History and development 10

2 Foreign currency risk prevention products and services at Vietcombank 12

3 Differences in foreign currency risk prevention products and services of Vietcombank and ABBank 13

3.1.1 General introduction of ABbank Joint Stock Commercial Bank 13

3.1.2 Rationale for Choosing These Two Banks 14

3.2 Detail of differences in foreign currency risk prevention products and services of Vietcombank and ABBank 16

3.2.1 Foreign Exchange Risk Hedging Products and Services of Vietcombank .16

3.2.2 Foreign Exchange Products and Services of ABBank 17

3.2.3 Key Differences Between Vietcombank and ABBank 17

4 Willingness to use the services of Vietcombank to avoid foreign currency risks 17

4.1 Vietcombank's Reputation and Market Position 17

4.2 Diverse and Flexible Risk Management Products 18

4.3 Comprehensive Advisory Services and Customer Support 18

4.4 Commitment to Security and Transparency 18

4.5 Clear Benefits and Value Proposition 19

CHAPTER 3: EVALUATE FOREIGN CURRENCY RISK HEDGING PRODUCTS AND SERVICES OF VIETCOMBANK 20

1 Evaluation of Vietcombank's foreign currency risk hedging products and services 20 1.1 Advantages 20

1.2 Disadvantages 21

2 Provide recommendations for Vietcombank to make foreign currency risk hedging services more attractive for companies 21

2.1 Simplify Procedures 21

2.2 Strengthen Cooperation with Import and Export Enterprises 22

2.3 Legal and Policy Support for Enterprises 22

CONCLUSION 23

Inanincreasinglyglobalized economy,businessesoperatingin Vietnamface

significantforeigncurrencyexchangerisksduetofluctuationsinexchangerates.Tomitigatetheserisks,commercialbanksinVietnamofferarangeofhedgingservicesdesigned  to  protect  companies  from  adverse  currency  movements  These  services

includeforwardcontracts,options,andswaps,eachtailoredtomeetthespecificneedsofbusinessesengagedininternationaltrade.Byutilizingthesehedginginstruments,companies  can  stabilize  their  cash  flows,  budget  more  accurately,  and  ultimately

enhancetheirfinancialstabilityinthevolatileforeignexchangemarket.

ThispaperexploresthehedgingservicesprovidedbyJointStockCommercial

BankforForeignTradeofVietnam(Vietcombank),comparesofferingswithAnBinhCommercial  Joint  Stock  Bank  (ABBank),  and  evaluates  the  effectiveness  of  these

servicesfromacostumer'sperspective

CHAPTER 1: GENERAL THEORIES ON HEDGING SERVICES FOR

FOREIGN CURRENCY EXCHANGE

1 Definition of foreign exchange risk

Foreign  exchange  risk  refers  to  the  losses  that  a  business  conductinginternationaltransactionscanincurduetofluctuationsincurrencyrates.Changesintherelativevalueofthecurrenciesinvolvedcanchangetherealcostsofgoodsorderedfrom  abroad  or  delivered  to  a  foreign  customer,  or  increase  the  cost  of  a  plannedexpansioninaforeigncountry.Investmentsinforeigncompaniescansufferlossesdueentirelytoexchangeratechanges

2 Types of foreign exchange risk

● Transactionrisk:Thisistheriskthatacompanyfaceswhenitbuysaproductfrom  a  company  located  in  another  country  The  price  of  the  product  will  bedenominated  in  the  selling  company's  currency  If  the  selling  company's  currencyappreciatesversusthebuyingcompany'scurrency,thecompanydoingthebuyingwillhavetomakealargerpaymentinitsbasecurrencytomeetthecontractedprice

● Translation  risk:  A  parent  company  owning  a  subsidiary  in  another  countrycould  face  losses  when  the  subsidiary's  financial  statements,  which  will  bedenominated  in  that  country's  currency,  have  to  be  translated  back  to  the  parentcompany'scurrency

● Economicrisk:Alsocalledforecastrisk,thisoccurswhenacompany’smarketvalueiscontinuouslyimpactedbyunavoidableexposuretocurrencyfluctuations

3 Some techniques to hedge foreign exchange risk

3.1 Hedging by forward contracts

3.1.1 Definition

Aforwardcontractinforeignexchangeisanagreementbetweentwopartiestoexchangeaspecifiedamountofonecurrencyforanotheratapredeterminedexchangerate,settoday,butwithasettlementdateinthefuture

3.1.2 Characteristics of Forward Contracts

Customization:Forwardcontractscanbetailoredtomeetthespecificneedsofthepartiesinvolved,includingtheamountofcurrencyandthesettlementdate

No  Upfront  Payment:  Typically,  there  is  no  initial  payment  required  whenenteringintoaforwardcontract,makingitaccessibleforbusinesseslookingtohedgewithoutimmediatecashoutlay

Obligation  to  Execute:  Both  parties  are  obligated  to  fulfill  the  terms  of  thecontractatmaturity,regardlessofmarketconditions

3.1.3 Advantages and disadvantages of Using Forward Contracts

● Advantages

CostEffectiveness:Forwardcontractstypicallyhavenoupfrontfees,makingthemmoreaccessiblethanoptions-basedhedging

CertaintyinCashFlow:Byfixingtheexchangerate,companiescanbudgetandforecastfuturecashflowsmoreaccurately,reducingcashflowvolatility

Customized  Solutions:  Because  forwards  are  tailored,  companies  can  alignthemtomeetspecificoperationalneeds,likematchingsettlementdateswithexpectedcashflowsfromoperations

● Disadvantages

OpportunityCost:Ifthemarketmovesfavorablyafterenteringintoaforwardcontract,companiesmaymissoutonpotentialgainsfrommorefavorableexchangerates

ObligationtoPerform:MNCsmustfulfilltheircontractualobligationsevenifmarket  conditions  change  unfavorably,  which  can  lead  to  financial  strain  if  notmanagedproperly

Counterparty  Risk: There  is  a  risk that  the  other  party may default on  theirobligations,particularlyiftheyfacefinancialdifficulties

3.2 Hedging by futures contracts

Margin  Requirements:  Traders  must  post  an  initial  margin  (a  deposit)  andmaintain  a  maintenance  margin  If  the  contract’s  value  changes,  margin  calls  mayrequireadditionalfunds

Mark-to-Market:Futuresaremarkedtomarketdaily,meaninggainsorlossesarerealizeddaily,whichcanimpactcashflowandworkingcapital.Thisdiffersfromforwards,wheregainsandlossesareonlyrealizeduponsettlement

3.2.3 Advantages and disadvantages Using Futures Contracts

● Advantages

Liquidity:  The  standardized  nature  of  futures  contracts  typically  results  inhigher  liquidity  compared  to  forward  contracts,  allowing  MNCs  to  enter  and  exitpositionsmoreeasily.

Reduced  Counterparty  Risk:  Futures  contracts  are  backed  by  clearinghousesthat  guarantee  the  performance  of  the  contract,  significantly  lowering  counterpartyrisk

TransparencyandPriceDiscovery:Thecompetitivenatureoffuturesmarketsprovides  transparent  pricing,  enabling  firms  to  make  informed  decisions  based  oncurrentmarketconditions

FlexibilityinHedgingStrategies:MNCscanutilizefuturescontractsaspartofabroaderriskmanagementstrategy,allowingforvarioushedgingapproachestailoredtospecificcurrencyexposures

● Disadvantages

Standardization Limitations: Thefixed contract sizes may notalign perfectlywithanMNC'sspecificexposureneeds,potentiallyleadingtoover-hedgingorunder-hedgingsituations

Margin  Requirements:  The  need  for  margin  accounts  can  create  liquidityconstraintsifsignificantpricemovementsoccur,requiringadditionalcashoutlays.PotentialforMarginErosion:Becauseofthedailysettlementandrequirementtomaintain a marginaccount, companies couldface opportunity costsand possiblecashflowstrain,impactingworkingcapital

3.3 Hedging by currency options

3.3.1 Definition

Acurrencyoptionisafinancialderivativethatprovidestheright,butnottheobligation,  to  exchange  a  specific  amount  of  one  currency  for  another  at  apredeterminedrate(knownasthestrikeprice)onorbeforeasetexpirationdate.Therearetwomaintypesofoptions:

-CallOption:Givestheholdertherighttobuyacurrencyatthestrikeprice

-PutOption:Givestheholdertherighttosellacurrencyatthestrikeprice

3.3.2 Characteristics of Currency Options

Flexibility:Unlikefuturesorforwards,optionsprovideflexibilityastheydonotobligatetheholdertoexecutethecontractifitisnotfavorable

PremiumCost: Options comewithanupfrontpremium, whichisthe costofpurchasingtherightwithoutanobligation.Thispremiumisnon-refundable

3.3.3 Advantages and disadvantages of Using Currency Options

● Advantages

to  transact,  MNCs  can  choose  whether  to  exercise  their  options  based  on  marketconditionsatexpiration.Thisflexibilityisparticularlyvaluableinvolatilemarkets.PotentialforProfit:Ifmarketconditionsmovefavorably,anMNCcanletitsoption  expire  and  transact  at  more  advantageous  market  rates,  effectively  profitingfromfavorable  movementswithout incurring losses from exercising an unfavorableoption

Strategic  Use  in  Uncovered  Positions:  Currency  options  are  particularlyeffectiveforhedginguncoveredpositionswherefuturecashflowsareuncertain.Theyallowfirmstohedgeagainstpotentiallosseswithoutlockinginaspecificrate

● Disadvantages

Costof Premiums:The upfrontpremium paidfor optionscan besignificant,especiallyforlonger-datedcontractsorhighlyvolatilecurrencies.Thiscostmustbeweighedagainstpotentialbenefits

Complexity:Optionscanbemorecomplexthanotherhedginginstrumentslikeforwardsorfutures.MNCsrequireexpertiseinpricingmodelsandmarketbehaviortoeffectivelyutilizeoptions

3.4 Hedging through the money market

3.4.1 Definition

Moneymarkethedginginvolvesborrowingandlendingindifferentcurrenciestoachieveasimilareffectasaforwardcontract,lockinginaneffectiveexchangerateforafuturecashflow.

3.4.2 Steps in Money Market Hedging

● HedgingaForeignCurrencyPayable

Ifacompanyhasapayableinaforeigncurrencydueinthefuture,itcanhedgeby:-Borrowingthepresentvalueofthepayableintheforeigncurrency

-Convertingthisborrowedamounttothedomesticcurrencyatthecurrentspotrate.-Investingthedomesticcurrencyproceedsuntilthepayableisdue

● HedgingaForeignCurrencyReceivable

Ifacompanyexpectsaforeigncurrencyreceivable,itcanhedgeby:

-Borrowingthepresentvalueofthereceivableinthedomesticcurrency

-Convertingittotheforeigncurrencyandinvestingitattheforeigninterestrate

3.4.3 Advantages and disadvantages of Money Market Hedging

● Advantages

Customization:Moneymarkethedgescanbetailoredtospecificamountsandtiming  needs,  offering  flexibility  that  may  not  be  available  with  standardizedinstrumentslikefuturesoroptions

Cost-EffectivenessforSmallTransactions:Forsmallerbusinessesoroccasionaltransactions,moneymarkethedgescanbesimplerandlesscostlythanotherhedgingmethods

Avoidance of Counterparty Risk: Since this method relies on borrowing andlending  through  established  financial  institutions,  it  minimizes  counterparty  riskcomparedtoover-the-counterderivatives

● Disadvantages

OpportunityCost ofCapital: Moneymarket hedginginvolves borrowingandlending  cash,  which  can  tie  up  capital  that  might  be  used  elsewhere  The  need  toborrowandinvestcanincreaseopportunitycostscomparedtoforwardcontracts.InterestRateSensitivity:Moneymarkethedgingreliesoninterestratesinboththedomesticandforeigncurrency.Unexpectedchangesinshort-terminterestratescanimpacttherelativecostsandattractivenessofmoneymarkethedging

Operational Complexity:  For some companies,  managing multiple short-termborrowings  and  investments  across  currencies  may  require  additional  operationaloversight,particularlyifdealingwithlargetransactionvolumesorfrequentcashflowrequirements

CHAPTER 2: CURRENT STATUS OF FOREIGN CURRENCY RISK PREVENTION PRODUCTS AND SERVICES AT VIETCOMBANK

1 Overview of Vietcombank

1.1 Introduction of Vietcombank

Vietcombank(VCB) wasestablishedandofficiallycommencedoperationsonApril1,1963,withitspredecessorbeingtheCentralForeignExchangeBureauunderthe  State Bank  of  Vietnam  With over 60  years  of  development, Vietcombank  hasmadesignificantcontributionstoeconomicstability,playingaleadingroleinforeigntradebanking,supportingthedomesticeconomyeffectively,andexertingsubstantialinfluenceintheregionalandinternationalfinancialcommunities

VietcombankaimstobecomethenumberonebankinVietnam,rankedamongtheTop100largestbanksinAsiaandtheTop300leadingfinancialgroupsglobally,aswellaswithintheTop1,000largestpubliclylistedcompaniesworldwide.Thebankseeks  to  lead  in  profit  scale,  digital  transformation  within  the  banking  sector,  riskmanagement, quality ofhuman resources, and governance ofenvironmental, social,andcorporateresponsibilities,withaspirationstolistitssharesoninternationalstockmarkets  These  goals  are  intended  to  contribute to  the  sustainable  development  ofVietnam

Vietcombank  is  currently  one  of  the  largest  banks  in  Vietnam,  with  600branches/transaction  offices/representative  offices/subsidiaries  domestically  andinternationally,including:

- RepresentativeofficesinHoChiMinhCity,Singapore,andtheU.S

- 3operationalunits:TrainingandDevelopmentSchoolforHumanResources,CashProcessingCentersinHanoiandHoChiMinhCity,

- 3jointventures/affiliatecompanies

1.2 History and development

● Period 1963 - 1975 : Established during  wartime and actively participated in

nationalreunificationefforts

OnApril1,1963,VietcombankofficiallybeganoperationsunderDecreeNo.115/CP.DuringtheresistanceagainsttheUnitedStates,Vietcombankservedasthe

● Period 1976 - 1990 :Strongdevelopmentduringchallengingtimes

VietcombankwasthesoleforeigntradebankinVietnam,performingallthreefunctions:holdingforeigncurrency,processinginternationalpayments,andprovidingexport-importcredit.After1975,thebanktookoverthefinancialsystemoftheformerregime,  participated  in  state  debt  reduction  negotiations,  and  supported  post-wareconomicrecovery

● Period 1991 - 2007: Steadyprogressduringintegrationandreform

Vietcombanktransitionedfromaspecializedbanktoastate-ownedcommercialbank  with  an  extensive  network  and  global  partnerships  The  bank  successfullyimplemented  the  Restructuring  Project  (2000-2005)  to  enhance  financial  capacity,management,  and  technological  innovation,  contributing  to  economic  stability  andgrowth

● Period 2007 - 2013 : Pioneering  privatization,  becoming  a  leading  bank  in

Vietnam

In  2007,  Vietcombank  led  the  privatization  process  in  banking  and  issuedsharestothepublic.OnJune2,2008,Vietcombankofficiallyoperatedasajoint-stockcommercialbankandlistedontheHoChiMinhCityStockExchange.OnApril1,2013,Vietcombankcelebratedits50thanniversaryandunveiledanewbrandidentitywiththemessage“SharingTrust,FirmlyTowardstheFuture.”

● Period 2013 – 2018 :Breakthroughactivities,reachingnewheights

From  2013  to  2018,  Vietcombank  experienced  significant  changes,  withexceptionalgrowthinassets,capitalmobilization,andcredit.In2018,Vietcombankledthebankingsectorwithaprofitof18.269trillionVNDandpaidsubstantialtaxes.Vietcombank became the first  bank in Vietnam to reduce  the actual bad debt  ratiobelow1%andachievedBaselIIstandardsaheadofschedule

● Period 2019 :Continuedexpansion,achievingrecordprofitof1billionUSD

November1,2019:VietcombankofficiallyopeneditsrepresentativeofficeintheUnitedStates

November12,2019:VietcombanksignedaninsurancedistributionagreementwithFWDLifeInsurance,markingthelargestlifeinsurancepartnershipinVietnamatthetimeofsigning

● Period 2020-2024: Leadingininnovationanddigitaltransformation

January27,2020:Withmodernbankinginfrastructureandthesuccessfulcorebanking  transformation,  Vietcombank  gained  significant  advantages  in  applyingadvanced  technology  to  automate  banking  services,  developing  electronic  banking

products  and  services  based  on  high-tech  platforms  The  digital  transaction  space,alongwithmulti-utilitydigitalbankingservicesforindividualandcorporatecustomerssuch as  VCB  Digibank, VCB-iB@nking,  VCB  CashUp, VCB DigiBiz,  and  others,havebeen,are,andwillcontinuetoattractmanycustomerswiththeirconvenience,speed,security,andeffectiveness,promotingcashlesspaymenthabitsamongawidecustomerbase.

Vietcombank  has  received  prestigious  awards,  recognized  as  the  mostinnovativeandefficientbankinVietnamandastandoutdigitaltransformationbank

2 Foreign currency risk prevention products and services at Vietcombank Foreign exchange:

● Foreignexchangeoptions:

- Content:

The  client buying  the option  has  the  right  (but  not  obligation)  to  buy  or sell  aforeigncurrencyamountinexchangeforanotherforeigncurrencyataspecifiedrate(attradedate)andpaymentdate.

TypesofOption:Calloption,Putoption

- Benefits:

Mitigaterisksofcurrencyvolatility,promotingthesustainabledevelopmentofthebusiness

Retaintherighttoexercisetheoptionofbuyingorsellingforeigncurrenciesatapredeterminedexchangerateifprofitable

- Conditions for business:

Upon buying  foreign currency  in a FX  Option, clients must  provide documentsevidencingthepurpose,quantity,andtypeofforeigncurrencies,settlementdateforpayment/wiretransferinaccordancewithapplicableregulationsonforeigncurrencymanagement

- Conditions for business: