Subject international finance lecturer nguyen duong phuoc tri topic group report

According to a report by the Bank for International Settlements BIS, the notional value of derivatives contracts worldwide reached nearly $600 trillion in 2023, primarily concentrated in

AMINISTRY OF EDUCATION AND TRAINING UNIVERSITY OF ECONOMICS - FINANCE

HO CHI MINH CITY

UNIVERSITY OF ECONOMICS & FINANCE

SUBJECT: INTERNATIONAL FINANCE

Lecturer: Nguyen Duong Phuoc Tri

TOPIC: GROUP REPORT

HCM City, 26/12/2024

I Derivatives Market:

This is a marketplace for trading financial derivative instruments, including futures contracts, options, forwards, and swaps These instruments are based on the value of an underlying

asset such as stocks, bonds, commodities, interest rates, or indices

1 The role of the derivatives market:

¢ Risk management: It serves as a hedging tool against price volatility

e Speculative profit: It allows investors to leverage their positions to maximize

returns

e Asset pricing: It contributes to creating an efficient pricing mechanism for underlying assets

¢ Increased liquidity: It helps improve liquidity in financial markets

The derivatives market has two types:

This is a market where derivative instruments are traded on stock exchanges (Exchange-Traded Derivatives - ETD)

Derivative instruments such as futures contracts and options are typically listed in this

category

Characteristics:

underlying asset, etc.)

© There is a clearing mechanism through a clearing house, ensuring

transparency and safety

o Examples: Chicago Mercantile Exchange (CME), Vietnam Stock Exchange (VNX) provide derivative products

© Over-the-Counter Market (OTC):

This is a market where derivative transactions are conducted directly between parties without going through a stock exchange

Instruments such as forwards and swaps typically fall into this category

Characteristics:

o Contracts are designed flexibly, customized to the needs of the parties involved

o It carnes credit risk due to the absence of an intermediary organization ensuring transactions

© Itis primarily used by financial institutions and large corporations

The derivatives market in Vietnam:

¢ History of formation and development: The Vietnamese derivatives market officially commenced operations in 2017, with the first product being the VN30 index futures contract

Rapid Growth: Within just a few years, the market has witnessed a significant increase in the number of investors, trading volume, and products

Contribution to the Economy: The Vietnamese derivatives market is increasingly asserting its role as an effective investment channel and a risk- hedging tool for investors Particularly during periods of decline in the underlying market, the derivatives market plays a crucial role in stabilizing investor sentiment and mitigating risks

Scale and Liquidity: The Vietnamese derivatives market has experienced strong growth in scale and liquidity over the years The average trading volume of VN30 futures contracts has surged from 10,954 contracts per session in 2017 to nearly 250,000 contracts per session in the first 11 months of 2022 The number of derivative trading accounts has also continuously increased, reaching 1,341,152 accounts as of July 31, 2023, which is 546 times higher than at the market's inception

Limited Products: Currently, the primary products are futures contracts based on the VN30 index and government bond futures

Predominantly Domestic Investors: The majority of market participants are individual and institutional investors from within the country

Legal Framework is Improving: The legal framework for the derivatives market

is being continuously refined to ensure sustainable and effective market development

Overview of the Global Derivatives Market

Global Derivatives Market: has a long-standing history, originating in Mesopotamia (around 1750 BC) Primitive futures contracts appeared in the form

of agreements for the delivery of commodities (wheat, barley) at a specific future date, aimed at stabilizing prices and reducing risks for farmers

The global derivatives market: is currently shaped by major financial centers such as the United States, Europe, and Asia According to a report by the Bank for International Settlements (BIS), the notional value of derivatives contracts worldwide reached nearly $600 trillion in 2023, primarily concentrated in interest rate and foreign exchange products

Some of the major derivatives markets in the world include:

Chicago Mercantile Exchange (CME) Group: The largest derivatives exchange in the world, offering derivatives products related to commodities, interest rates, stock indices, and foreign exchange

Eurex: The leading derivatives exchange in Europe, specializing in financial derivatives products

Hong Kong Exchanges and Clearing (HKEX): An important derivatives exchange

in Asia, providing derivatives products related to stock indices, equities, and commodities

Comparison

Time of NY tional si O17 Has been developed f | ti

Scale Much smaller Very large and diverse

Limited, mainly futures contracts on Diverse, including many types of derivatives

=_= a indices and bonds and underlying assets

Liquidity Growing but still lower High, especially in major markets

Includes both domestic and international Investors Mainly domestic investors : TH:

investors, large organizations

Legal

Framework Undergoing improvement Has a complete and developed legal system

II Overview of the Foreign Exchange Market in Vietnam and Worldwide

The foreign exchange market (Forex, FX) is a decentralized market where currencies are traded It is the largest and most liquid financial market in the world, with daily trading volumes reaching thousands of billions of US dollars This report will provide an overview of the foreign exchange market in Vietnam and globally, while also comparing the differences between these two markets

1 Global Foreign Exchange Market:

¢ Concept: The foreign exchange market (Foreign Exchange Market - Forex) is one

of the largest financial markets in terms of global trading volume Daily, the Forex market records an estimated average trading volume of approximately 7.5 trillion USD (2022), far exceeding other markets such as stocks or commodities

¢ Characteristics:

- Scale: Extremely large, with participation from central banks, commercial banks,

investment funds, multinational corporations, and individual investors

- Liquidity: The highest among financial markets, allowing transactions to occur quickly and at low costs

- 24/5 Operation: The market operates continuously 24 hours a day, 5 days a week, from Monday to Friday, due to a network of financial centers around the globe operating across different time zones

- Decentralized: There is no physical trading floor; transactions are conducted through

an electronic network among banks, financial institutions, and investors

- Interest Rates: Changes in interest rates by central banks significantly impact currency values

all affect exchange rates

Politics: Political instability, elections, and government policies can cause fluctuations in the foreign exchange market

News and Events: Economic announcements and significant political events can create short-term volatility in the market

¢ Role:

Supporting International Trade: Facilitates the exchange of goods and services between countries

International Investment: Allows investors to access global financial markets Currency Risk Hedging: Businesses can use the foreign exchange market to protect themselves from exchange rate fluctuations

Vietnamese Foreign Exchange Market:

¢ Concept: The Vietnamese foreign exchange market is a part of Vietnam's financial system, managed and regulated by the State Bank of Vietnam (SBV)

¢ Characteristics:

Scale: Compared to the global market, the scale of the Vietnamese foreign exchange market is still relatively small However, the trading volume is steadily increasing, as evidenced by the growth in foreign currency transactions between credit institutions and customers over the years (for example, from 280.7 billion USD in 2017 to 397.2 billion USD in 2021 - according to the Banking Journal)

Management: The State Bank of Vietnam (SBV) plays a crucial role in managing exchange rates, overseeing foreign exchange reserves, and stabilizing the market The SBV employs monetary policy tools such as the central exchange rate, interest rates, and required reserves to intervene in the market

Participants: Commercial banks, credit institutions, import-export enterprises, and investors

Transaction currencies: Primarily the US Dollar (USD) and the Vietnamese Dong (VND), along with other currencies such as the Euro (EUR), Japanese Yen (JPY), and British Pound (GBP)

SBV's monetary policy: Decisions regarding interest rates, exchange rates, and foreign exchange reserves by the SBV have a direct impact on the market

Trade balance: Trade surpluses or deficits affect the supply and demand for foreign currency

Foreign investment (FDI, FID): The influx of foreign investment into Vietnam creates a supply of foreign currency

Remittances: The volume of remittances sent back to Vietnam is also an important source of foreign currency supply

Macroeconomic conditions: GDP growth, inflation, public debt, etc., influence

confidence in the VND and the exchange rate

- Supporting import-export activities: Facilitating Vietnamese enterprises’ participation in international trade

- Macroeconomic stability: The SBV utilizes the foreign exchange market to regulate exchange rates, contributing to inflation control and economic stability

- Attracting foreign investment: A stable foreign exchange market creates a favorable environment for foreign investment

Size Very large Much smaller

Liquidity Very high Lower

Degree of Subject to strict regulations by the State Bank of

More freedom : Freedom NTs arena)

Trading Hours 24/5 During banking hours

Diverse, major currency Currency Pairs R

yral pairs (EUR/USD, USD/JPY, ) Mainly USD/VND

Global macroeconomic factors, State Bank of Vietnam's policies, domestic foreign exchange supply and demand

Influencing Global macroeconomic

Factors factors, politics, events

3 Trends in the foreign exchange market (Forex)

e Technology and automation applications

- Automated trading (Algo Trading): Algorithmic trading systems are increasingly favored, allowing traders to quickly capitalize on opportunities and minimize emotion-driven errors

- Artificial Intelligence (AT) and Machine Learning: Utilizing AI to predict market trends, analyze big data, and support decision-making

- Blockchain and cryptocurrencies: The development of blockchain and digital assets such as Bitcoin and Ethereum has expanded the scope of foreign exchange trading, particularly in cross-border transactions

¢ Enhancing transparency and regulation

- Risk management and transparency: Many countries are tightening regulations to protect investors from fraudulent activities

- The development of licensed exchanges: The trend is shifting from unregulated trading to exchanges supervised by regulatory authorities

¢ Increasing participation of individual investors

- Enhanced market access: With the development of online trading platforms, more individual investors are participating in the Forex market

trading communities enables individual investors to easily access and learn

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¢ Impact of Global Economic Factors

Globalization: The interconnectedness of economies increases the demand for foreign exchange transactions to protect asset values and promote international trade Economic and Political Instability: Geopolitical events, inflation, and changes in monetary policy will continue to be significant factors influencing exchange rate volatility

¢ Growth in Emerging Markets

Asia and Africa: Emerging countries with rapidly developing economies will be the new growth drivers for the Forex market

Increased Cross-Border Trading: The rise in international trade and foreign investment boosts the demand for foreign exchange transactions

¢ More Flexible Trading Environment

Multi-Asset Trading: Many exchanges integrate foreign exchange, cryptocurrencies, commodities, and stocks, providing investors with greater flexibility

Enhanced Mobile Access: Trading applications on smartphones are becoming the standard, enabling traders to participate at any time

e Impact of Environmental Factors (ESG) Sustainable Investing:

The ESG trend may influence trading decisions as financial companies focus on sustainable development

Ill Analysis of Factors Affecting Exchange Rates

1 Inflation

® Impact: Inflation is the condition where the general price level of goods and services rises over a certain period When a country's inflation rate rises higher than that of other countries, its currency tends to depreciate

e Explanation: Inflation increases the prices of domestic goods, leading to a decrease in exports as goods become more expensive, while imports rise as foreign goods become cheaper An increase in foreign currency supply and a decrease in domestic currency demand will cause the domestic currency to depreciate

¢ Example: In 2023, inflation in Turkey surged to over 50%, causing the lira to depreciate significantly against the USD The USD/TRY exchange rate rose from around 13 at the beginning of 2022 to over 27 by mid-2023

Interest Rate

Higher interest rates in a country typically attract foreign investment flows, increasing the value of the domestic currency

Conversely, low interest rates reduce the attractiveness of the domestic currency, leading to depreciation

e Explanation:

High Interest Rates: Make investment yields in the domestic currency more attractive, encouraging international capital inflows, thereby increasing demand for the domestic currency

Low Interest Rates: Conversely, low interest rates will cause capital to flow out of the country, reducing the value of the domestic currency

e Example:

In the United States during 2022-2023, the Federal Reserve (Fed) significantly raised interest rates from 0.25% to 5.25% to control inflation, resulting in a capital influx into the USD and a substantial appreciation of the dollar against most other currencies

Income Level

When national income increases, imports of goods typically rise sharply, leading to increased demand for foreign currency, which exerts downward pressure on the domestic currency

If income growth is accompanied by a higher export production capacity, the domestic currency may appreciate

e Explanation:

As a country's income rises, consumption and investment demand also increase This leads to heightened demand for imports, raising the demand for foreign currency and putting pressure on the exchange rate

e Example:

In rapidly developing countries with increasing income, such as Vietnam, the demand for technology and machinery imports from developed nations rises significantly, exerting downward pressure on the domestic currency

Direct and Indirect Intervention

Direct intervention: The government or central bank can buy/sell foreign currency to stabilize the exchange rate

Indirect intervention: Utilizing monetary policy tools (interest rates, reserve requirements) or fiscal policy to adjust the market

e Explanation:

Direct intervention: The government can purchase foreign currency to increase its supply, thereby reducing the value of the domestic currency Conversely, selling foreign currency decreases its supply, increasing the value of the domestic currency Indirect intervention: through interest rate or money supply policies alters the dynamics of foreign currency supply and demand

e Example:

- China: The People's Bank of China frequently intervenes in the foreign exchange market by controlling the exchange rate of the yuan through a narrow band

mechanism to support exports

5 Expectations

- Expectations regarding economic policy, interest rates, or political instability can increase exchange rate volatility as investors adjust their behavior

e Explanation:

- Ifexpectations of rising interest rates prevail, capital will flow into that country before the policy is actually implemented, leading to an appreciation of the domestic currency

- Conversely, if the market anticipates instability or economic downturn, the domestic currency may depreciate rapidly

e Example:

- The UK post-Brexit: When the Brexit results were announced in 2016, the British pound sharply depreciated due to expectations of economic decline and future instability,

6 Balance of Payments

- The balance of payments is a comparison of the total value of a country's economic transactions with other countries over a specific period

e Explanation:

- Surplus balance: When a country exports more than it imports, the balance of payments will show a surplus This results in a greater supply of foreign currency than demand, leading to a depreciation of the domestic currency

- Deficit balance: Conversely, a deficit balance will increase demand for foreign currency and exert pressure on the exchange rate

e Example:

- If Vietnam exports rice to other countries in large quantities, the balance of payments will be in surplus, leading to a depreciation of the US dollar against the Vietnamese dong

IV Overview of Joint Venture:

¢ Definition:

- A Joint Venture is a form of business collaboration between two or more parties to establish a new enterprise, operating as an independent legal entity with the goal of achieving mutual benefits The parties contribute capital, assets, expertise, and share profits and risks from the joint venture's activities

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¢ Characteristics:

- All participating parties have nghts and obligations according to the agreement

- Joint Ventures typically possess independent legal status, distinct from the parent company or participating partners

- The decision-making process requires consensus among the parties

e The role of Joint Ventures in business strategy:

- Global:

© Facilitates entry into international markets at a lower cost

© Shares local advantages such as cultural knowledge, legal frameworks, and distribution networks

- Domestic:

© Enhances competitive capacity through support from partners in finance, technology, or networks

© Assists small or medium-sized enterprises in accessing opportunities that they cannot exploit independently

Case Study: TOYOTA VIETNAM (TMV)

I Context and Motivation:

a) Reasons for forming the joint venture

- Inthe mid-1990s, as Vietnam opened its economy and the automotive market was still nascent but full of potential, Toyota quickly seized the opportunity and signed a joint venture agreement with VEAM in 1995 to establish Toyota Vietnam Company Officially operational since September 1996, TMV focused on the production and distribution of automobiles, marking Toyota's first entry into the Vietnamese market

e Sharing risks and costs:

- At that time, the Vietnamese market was still immature, with an underdeveloped legal system and infrastructure Collaborating with VEAM allowed Toyota to mitigate investment and operational risks

e Leveraging resources and capabilities:

- Toyota contributed modern technology, advanced production processes, and

management expertise

- VEAM provided insights into the domestic market, existing infrastructure, and relationships with Vietnamese government agencies

e Overcoming legal and trade barriers:

- During this period, Vietnam had stringent regulations regarding foreign investment and preferential policies for joint ventures with state-owned enterprises Partnering with VEAM enabled Toyota to more easily penetrate and operate in this market

b) Target market analysis