Luận văn developing the business of commodity future contract at techcombank from a marketing perspective

Techcombank with over 15 years of establishment and devclopment has been aware of this tendency as well as accepted by the Government and the State bank of Vietnam, becoming the first

VIETNAM NATIONAL UNIVERSITY, HANOI

DEVELOPING THE BUSIN OF COMMODI’

AT TECHCOMBANK - FROM A MARKE'

TURE CONTRACT ERSPECTIVE

1, Dr, Tran Doan Kim

2, Ph.D Candidate Tran Phuong Lan

Hanoi - 2009

A-l0 /bob

Chapter 1, Literature Review

1.2.4.1 Target customers of the Commodity Future Contract

1.2.4.2 Benefits of commodity future contract

1.2.5 Issues on developing Commodity Future Contract

Chapter 2, Analyzing the marketing situation of TechcombankLs

Commodity Future Contact Business

2.1, Overview of Techcombank 2.1.1, Introduction about Techcombank

2.1.2 Vision and Mission

3.1 Strategic Objectives of TechcomBank 64

3.1.2 The Commodity Future Contract Objectives at ‘Techcombank 65 3.2 Marketing Recommendations for developing the business of .-66 Commodity Future Contracts at Techcombanik +

Appendix 2: Price Differential of Crude Oil and Gold

Appendix 3 : Hedging Regulations and Methods

3.7.1 Commodity Future Contract for Rubber,

2.7.2 Commodily Future Contract for Coffee

3.7.3 Commodity Future Contract for Chot

2.7.4 Commodity Future Contract for Metal

List of Tables

‘Table 2.1 Managerial Structure at Tochcambank

Table 2.2 Commodity Future Contract at Techcombank

List of Figures

Table 1.1 Price Differential of Crude Oil tu July 2008 RR

Table 1.2 Price Differential of Gold to July 2008 89

Vable 2.3 Rubber - Prices and Trading Volume .92

Table 2.4 Price Diflerential of Rubber to October 2008 9S

Table 2.5 Price Differential of Coffee Robusta 10 October 2008 97

Table 2.6 Inilial & Maintenance Margin Exchange Minimum Margins 98

fable 2.7 Price Differential of Soybean to October 2008

ee Ol Table 2.8 Price Differential of Tin to October 2008

xi

Preface

Globalization and Integrating inlo international cconomy are the indispensable tendency to our country’s economy especially when Vietnam

has joined WTO These will bring both many opportunities and challenges to

the field of Banking and Finance of Vietnam It is passible ta say that, international changes have more and more important imp;

s on the Banking and Finance of the Country these require that the Banking Industry has to be explicit in information, encourage the liquidation ability and to be active to

have methods and 1eols to prevent the risk to diminish the risk Among them, developing Derivatives Market in general and Future Market in particular is

one of important solutions Because, the Derivatives Market will contribute to

the encouragement of three main services, including: sharing the risk, liquidation and information that the financial market has provided

Techcombank with over 15 years of establishment and devclopment has

been aware of this tendency as well as accepted by the Government and the

State bank of Vietnam, becoming the first bank of Vietnam to provide the

Commodity Future Contract to Vietnamese Enterprises with a view to

preventing risk from price dillerential when they deliver physical

commodities in a huge market with many changes Techcombank has been

trying its best to provide this service actively and efficiently but more and more Banks have provided this service so Techcombank has to improve this

service more to attract new customers and maintain current ones to ensure its business better and better Therefore the this thesis is aimed to study and propose solutions to both develop the service playing an important role in business result of the Bank as well as a tool to help enterprises avoid risks from price differential when doing business.

1, Research Objectives

© Literature review about Service Marketing as well as Future Market

¢ Analysis and propose solutions to develop the business of Cummodity

Future Contract at Techcombank

What Techcembank has done so far to develop the business of

Commodity Future Contract?

What Conditions and Pre-requisites will it need lo develop this service

from a marketing perspective?

4 Scope of work

The thesis studies on Future Market as well as factors influence and measure business activities at Techcumbank Irom 2005 to 2008

5 Data source

The thesis bases on textbook of Options - Future and other Derivative,

Marketing Management, Sales Force Management as well as some websites and documents relating to this topic also use to collect information for the

theory part, to analyze business activities al Techeombank

6 Significance

The thesis study and analyze the business activities at Techcombank with

a view ta proposing solutions to develop the business of Commodity Future

Contract at Techcombank

7 Limitation

‘The thesis unly studies at the Board of Commodity — ‘Treasury Center of

Techvombank, the data and information are collected from this Board

8 Expected Results,

Studying en the theory of Marketing as well as the theory of Future Market and analyzing the case of Techcombank to propose solutions in order

to develop Commedily Future Contract at Techcombank and making it

become one of the leading banks of Vietnam to provide financial instruments

9, Structure

Excluding Preface, conclusion and reference part, there are 3 parts in this

thesis as chapter 1, chapter 2 and chapter 3

Chapter 1: Showing the general theory of Service Marketing as well as

Commodity Future Contract, and the overview on development of Commodity Future Contract in Vietnam,

Chapter 2: Analyzing the marketing situation of Techcombank's

Commodity Future Contract Business

Chapter 3: Marketing proposals for developing the business of Commodity Future Contract in coming years and as a result of this is that the

business result of the Bank will be better as well os providing a better financial too! for enterprises to avoid risks in price differential under the policy of the Party and the Government when Vietnam joined WTO from 1*

January 2007.

Chapter 1, Literature Review

1.1 General theory of Marketing

1.1.1 Definition of Marketing

here are many definitions of marketing ‘hey are focused on customer

orientation and satisfaction of customer needs As for Philip Kotler :

Marketing is the sncial process by which individuals and group obtain what

they need and want through creating and exchanging products and value with

external factors becoming an indispensable role in building strategy for

enterprises These are macro factors in the macro-environment effecting the existence of any organization They are political factors, social factors,

economic factors, technulogical factors, environmental factors, legal factors and international factors, There are several model used to analyze macro

environment, they are PEST ( Political, Ecanomic, Social, Technological ),

PESTEL (Political, Economic, Social, Technologicat, Environmental, Legal ),

SLEPT(Social, Legal, Economic, Political, Technological)

Political factors: These refer w government policy such as the degree of

intervention in the economy What goods and services does the Government want to provide? To what extent does it believe in subsidizing firms? What are its priorities in terms of business support? Political decisions can have a

Chapter $ ~ Understanding market, Market Demand and the market

Environment, Macro-environment Trends and Forces

Marketing Management, Second Edition - Philip Kotler

considerable impact on many vilal arcas for business such as the education of

the workforce, the health of the nation and the quality of the infrastructure of

the econemy such as the road and rait system,

Economic factors: ‘These include interest rates, taxation changes,

economic growth inflation and exchange rates, income distribution, saving,

debt and ercdit availability For example

- higher interest rates may deter investment because it costs more to horrow

+ astrong currency may make difficult exporting because it may raise the

price in terms of foreign currency

- inflation may proveke higher wage demands from employees and raise

costs

- higher national income growth may boost demand for a firm's products

Social factors: Changes in social trends can have a considerable impact

on the demand for a firm's products and the availability and willingness of individuals to work Age, population, gender, race, education, religion,

marital status language, mobility, sexual orientation, ownership, income are social factors need to be taken into consideration In Viet Nam, for cxample,

the population has been young This has increased the costs for the Government and Firms to build infrastructures for the Youth to entertain themselves after a hard working day because its staffs are still young

Technological factors; New technologies not only create new products and new processes but also play an important role in reducing cost, improving quality and leading to innovation ‘These developments can benefit consumers

as well as the organizations thal are providing produets and services MP3 players, computer games, online gambling and high definition TVs are all new markets created by technulogical advances, Online shopping, bar coding

and computer aided design are all improvements to the way we do busine:

a result of better technology

Environmental factors: These include changes of weather and climate which can have an important impact on many industries like textile & garment farming, tourism Another issue of environmental factors is the

growing desire to protect the environment from the Government that will increase operating costs of many firms

Legal factors: These are legal regulations of the Government in using

labor, treatment to employees, minimum wages, recycling, cic These laws

can influence a firm’s costs as well as Ihe demand for its product

Besides, global factors are also macro-environmental factors that are

taken in analysis recently Globalization, free trade areas bilateral/multilateral/

trade agreements, cultural exchange, etc can influence the business of a firm

International factors: Vietnam is integrating into the world and regional economy One environment is said that It wil! be very severe for Vietnamese enterprises Doing research on international environment factor will help

specify its influential level to the operation ef Vietnamese enterprises

Integrating is when Vietnam remove barriers so Victnamese and foreign enterprises will join one market that has more exciting and severe

environment

1.1.2.2, Internal Environment

Below is very useful factors for enterprise to make decision in its

enterprise relating to the existence and development of the Firm They arc Strength, Weakness, Opportunity, Vhreat

Strength Factors: They are core and obvious competences of one

enterprise as well as the abilities to develop the competitive advantage such

patent well known and famous brand getting low cost because of core

manufacture abilities to approach the luxury natural resources and

distribution network,

Weakness Factors: The Firm that has no strength factor is one of

weakness factor, And in some cases, one weakness factor will be able to be a

strength factor and vice versa, for example: high productivity is considered as

onc of strength factors that no any competilor has it but it is also a weakness

factor if lhe Firm does focus on investing more in productivity, this will make the firm unable to edit quickly to satisfy the demand of customers

Opportunity Factors: Extemal environment can open more opportunities

lo create profit and develop for the Firm, such as: customer’s demand is

unsatisfied, the appearance of new technology, weak management of law, the

abolishment of international commerce barriers

Threat Factors: The changes of the conditions and environment can make threats for the firm, such as: the changes of customers’ attitude from one product or service of the firm to another, the appearance of substitutional

producv’service, new law system, new commercial barriers

1.1.3, Selecting Market Segment!

A market segment is a subgroup of people or organizations sharing one or more characteristics that cause them to have similar product and/or service

needs A (ue market segment meets all of the following criteria: it is distinct

from other segments (different segments have different needs), it is

homogeneous within the segment (ex! common needs); it responds

similarly to a market stimulus, and it can be reached by a market intervention

‘Vhe term is also used when consumers with identical product and/or service needs are divided up into groups so they can be charged different amounts

‘Chapter 9 - Identifving Market Segments and selecting target markets

Marketing Management Second Edition Philip Kotler

a

‘These can broadly be viewed as ‘positive! and ‘negative! applications of the same idea

In order to evaluate and choose the markel segment, the firm must look

al (wo factors: the scgment’s overall attractiveness and the company’s

objectives and resources First the firm must ask whether a potential segment

has the characteristics that make it generally attractive, such as size, growth,

profitability, scale economies and low risk Sccond the firm must consider

whether investing in the segment could makes sense given the firm's

objectives and resources Some attractive segments could be dismissed

because they do not mesh with the company’s long term objectives, some should be dismissed if the company lacking one or more of the competencies necded to offer superior value There are five patters of target market

selection, such as: Single-Segment Concentration, Selective Speciatization,

Product Specialization, Markel Specialization and Full Market Coverage

Single-Segment Concentration Through concentrated marketing, the Firm gains a thorough understanding of the chosen segment’s needs and

achieves a strong market presence Furthermore, each firm enjoys operating economy by specializing in its productian, distribution and promotion ff it

gains leadership, it can eam a high retum on investment However,

concentrated marketing involves risks; the segment may tum sour because of changes in buving patter or new competition For these reasons, many lirms prefer to operate in more than one segment

Selective Speciatization: The firm selects a number of segments, that are

quite objectively attractive and appropriate And each segment promises to be

a money maker This strategy has the advantage of diversifying the firm's tisk

Product Specialization: Another approach is to specialize in making a

certain product for several segments The firm makes dilTerent microscopes

for different customer groups and builds a strong reputation in the specific product area The downside risk is that the product may be supplanted by an

entirely new technology

Market Specialization Vhe Firm concentrales on serving many needs of

a particular customer group The Firm gains a strong reputation in serving this customer group and becomes a channel for further products that the customer

group can use The downside risk is thal the customer group may suffer fram budget cuts

Full Market Coverage: The Firm attempts to serve all customer groups

with all the products they might need Only very large firms such as IBM,

General Motors Coca Cola can undertake a full market coverage strategy

Large Firms can cover a whole market through undifferentiated marketing —

the firm ignores segment differences and goes alter the whole market with

one market offering or differentiated marketing - the firm operates in several

market segments and designs different programs for cach segment

1.1.4 Positioning!

Positioning is the act of designing the company’s offering and image to

occupy a distinctive place in the target market’s mind The end result of

positioning is the successful creation of a market - focused value proposition,

a cogent reason why the target market should buy the product

Two views of positioning: The word positioning was popularized by

two advertising executives ‘hey are seen posilioning as a creative exercise

a service,

a

Positioning starts with a product A piece of merchandise,

company, an institution or even a person bul positioning is not what you do to

a product

Positioning is what vou do to the mind of the prospect That is, you

position the product in the mind of the prospect

Ries and Trout argue that well-known products generally hold a

distinctive posilion in customers’ mind Coca-Cola, for example, holds the

position of world’s largest soft-drink firm To compete against this kind of

position a rival can strengthen its own current position in the consumer's mind ( the way 7- Up Advertised itself as the Uneola ), grab an unoccupied position ( as Snapple did with its tea-based beverages), or imply that it is in

the club with the “best™

Treacy and Wicrsema propose a different positioning frame work called

Value disciplines Within its industry, a firm could aspire to be the product leader, the operationally excellent firm or the customer intimate firm This is based on the notion that every market contains a mix of three types of

custumer Some custumers favor the firm that is advancing the technological

frontiers (product leadership), other customers want highly reliable

performance (operational excellence}, and still others want responsiveness in meeting their individual needs (customer intimacy) To succeed, a business should become the best at one of these value disciplines, perform adequalely

in the other disciplines and continue improving in all disciplines to fend off

away atone positioning and delivers on il, it will probably be best known and revalled lor this strength

1.1.5, Marketing Mix"

Every one knews thal the successlul marketing campaign depends on addressing some key issues ‘They are issues, such as: what a firm is going to

manufacture, how will it be in positioning in customer's mind, how will it

deliver to customers, how much does it cost as well as how will customers tell

about the service which they have purchased As this study is related to a

bank, the relevant marketing mix to be studied should be the 7Ps of Marketing They are: Praduct, Price, place, promotion, people, process and

physical evidence

1.1.5.1 Product

it’s no use to develop a product or service that ng one wanls to buy it, Many firms decide to produce first and than expect to find customers for their

products and services, Vice versa, many successful firms will focus on

finding out what customers want or need and then they produce the right

product or service with the right level of quality to mect the noceds of customers,

The Firm must give its customers what they want, not what the Firm thinks that Customers want The Firm must show that this is the perfect

product or service by providing its value in the eyes of the beholders

There is always an insurance policy with the product / service of the

Firm to approve the perfectness of them,

Always check information from customers to know what customers think about the praduct / service about the supparting service and what they want

‘Marketing and The 7Ps

The Charted Institute of Marketing

now in order for the Firm to have timely changes to mect ils customers

The scope of a service thal « bank offering includes privacy as well as

supporting elements such as warranties, guarantees and support One thing

(hat is very important is that we have to create value more than expected We

jomers will find us

must create exceeding expectations from customers, so

when they have demand to use Exceeding expectation is the way by which

value is created and they get sold Ihe finm can exceed expectations in price, quality or service and even possible all three factors but the Firm must

understand what it really means to exceed expectations before the Firm can

actually do it

1.1.5.2 Price

‘The product or service is worth by zero if customers don’t devide to buy

it, Therefore, the price needs to be competitive, but this does not mean that

the price is much cheaper than those of rivals Because no one works no salary so the Firm can add more some elements for the product / service with

the same price compared to those of rivals The Firm's pricing provides not only a profit, but also makes sure that the more the Firm charges, the more value or quality its customers will expect to get when buying its product or

service,

Based on demand, vost, price and expenses of rivals will be the foundation for the Firm to price its product/service, including: Markup Pricing Target - Return Pricing, Perceived - Value Pricing, Value Pricing,

Going Rate Pricing with a view both to recovering the initial cost and gaining profit,

L153 Place

The place where the customer decides to buy product or service is very important this reflects the means of distributing product or service to

customers H's not oly appropriate but also convenient for customers 1o

purchas Ss product/service This is “distribution channel” This will show

how big your distribution is, is it enough to cover all arcas inside and outside

the country There are some members to distribute product/service to customers including ; Direct Selling, such as with an outbound sales force or

via mail order, internet and telephone sales Agent, who typically sells

directly on be half ef the producer Distributor Gvhelcsaler}) who sell to

relailers Retailer ( dealer or reseller) who sell to ending customers

But the product/service must be ensured to be available in the right place,

at the right Lime and the right quantity, while keeping storage, inventory and

distribution costs to an aecepluble costs

1.1.5.4 Promotion

Promotion is the way that a Firm can communicate what it does and what

it can offer customers, It includes activities, such as: Branding, PR,

advertising, corporate identity, sales management, special offers and

exhibition as well as implementing an unique selling proposal Promotion

must gain atlention, be appealing, tell a consistent message and above all else

give customers a reason to choose the product or service of the Firm rather

than that of rivals Remember that guod promotion is not anly one-way

communication but also a dialogue with customers, it should communicate

the benefits that customers gain from the product or service _ not the features

from it, The promotion should be easy to read and it enable customers to

identity why they should buy the product or servi

Moreover, Promotion does not only mean communicating to the

customers but also ensure the intemal stakeholders who are aware of the value

and attribute from the product or service of the Firm In addition, this means

communicating to the stats, employees so that they can be knowledgeable

and share expertise with customers

1.1.5.5 People

People here can be all staffs working for that Firm even the director

Because each position will require cach professional knowledge and manage

each specific marketing There are four groups of people, including:

ˆ Communicating group of people: This group usually contacts tn

customers, has high position in the Firm, making decision in

busine:

strategy and giving aut marketing campaign

* Activity group of people: This group has smaller position in the

Firm, usually communicates with customers, understands what

customers want and finds the way to meet the demand of

customers

- The effect group of people: This group does not contact to

customers and implement the service These people have an impacts an marketing strategy, researching marketing plans,

innovating new products or services as well as other marketing to

attract new customers and maintain current customers

- The independent group of people: This group has each position in

the Firm, does not often contact to customers and implement the

service

Peuple here are sale-men or activily group of people so anyone coming into contact with customers must make an impression and put pro-found impact on customer's satisfaction Therefore they must be appropriately trained well motivated and have a right attitude, Making sure thal, the person who has contact with customers is not unly the properly trained person but also the right kind of the person for the job The level of after-sales support

and advice provided by the people that the Firm gncd are one way of adding value to what the lirm offers and can give the Firm an important edge over the competitors Maybe this will become more impertant than price

when customers start to buy al the first time

1.1.5.6 Process

The process of giving a service, and the behaviour of these who deliver are crucial to customers” satisfaction Issues such as: waiting times, the information given te customers and the helpfulness of staff are vital to keep customers happy Customers are not interested in detail of how the Firm runs

What matters to them is that system works

1.157 Physical Evidence

A service can’t be appreciated before it is delivered lo customers This

mean that choosing to use a service can be perceived as a risky business

because you are buying something intangible Uncertainly, this can be reduced by helping potential customers see what they are buying The physical evidence demonstrated by an organization must confirm the

assumptions of customers A financial service product will need to deliver in

a formal setting while a children’s birthday entertainment company should adopt a more relaxed approach

Each element of the markeling mix is a key to success No one element

can be considered in isolation For example: You can’t develop a product

without considering the price or how will it reach for customer

1.2 General Concept of Commodity Future Contract

1.2.1 Definition of Commodity Future Contract

To fully understand about the Commodity future Contract, you need to

know what commodities and Future Factors are The Merriam-Websters dictionary defines them as “articles for sale" In the financial world, they are

ollen known as raw materials Commodities are often items that you sec

everyday These include oil, grains, sugar, and many more These items are

hought and sold by investors, producers, and users The Future Factors here

are that, the prices af these commodities will be forecasted so they fluctuate

greatly based on supply, demand and external factors When there is less

demand or more supply of a product, the price drops When the demand is higher or the supply is lower, the commodity is in greater demand by the

public so the price rises For example, if there is turmoil in the Middle East,

the prices of oil would rise bceause it wauld threaten our oil supplies

However, if the Middle East announces that they are going to increase

production, then prices would fall because there would be greater supply These prices are constantly changing and here is where the futures contracts

Since both the parties are unaware of each other, the exchange provides a

mechanism to give the party assurance of honored contract The risk to the holder is untimited, and because the pay off pattem is symmetrical, the risk to

the seller is unlimited as well

Money lost and gained by each party on a futures contract are equal and opposite In other words, futures trading is a zero-sum game These are

certain

'" ©ptions - Future and other Derivatives

transaction at a future date The exchange of assets occurs on the date

specified in the contract These are regulated by overseeing agencies, and are gharanteed by clearinghouses Hedgers often trade futures for the purpose of keeping price risk in check

Future contracts are often used by commercial enterprises as “hedging, lools’ to reduce the risk of expected Juture purchases or sales of the underlying asset If used to speculate, risk increases So risk depends on the

underlying instrument and the use of the future

1.2.2 Types of Commodity Future Contract

From the beginning year of 1848, there was only Chicago Board of Trade

(CBOT) introduced to trade Future contract And now, there are 4 types of

Commodity Future Contracts, including ; Metals, Sofls, Energy and Grains &

Oilsceds It’s said that Commodity Future Contracts have both developed in

quality and quantity which are showed specifically below

- Commodity Future Contract of Metals includes: Base, Precious,

Strategic! Minor

- Commodity Future Contract of Sefts (Agriculture) includes : Coflec,

cocoa sugar and others

- Commodity Future Contract of Energy includes : Crude, Oil Products,

Gas

~ Commodity Future Contract of Grain and Oilsecds includes : Grains,

Oil Seeds, Live Stock and Fibers

1.2.3 The development of commodity future contract in the world!

The modern commodity markets have their roots in the trading of agricultural products While wheat and corn, catile and pigs, were widely traded using standard instruments in the 19th century in the United States,

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other basic foodstulls such as soybeans were only added quite recently in

most markets, For a commodity market to be established, there must be very

broad consensus on the variations in the product that make it acceptable for

one purpose or another

under the Future Trading Act of 1921 and Requirements for Designation as a

Contract Market under the Grain Futures Act of 1922 with a view to making

cuslomers trade more comlortably, safely and legally than before

However, the Commodity status of living things is always subject to doubt it was hard to validate the health or existence of sheep or goats Excuses for nan-delivery were not unknown, and there are recovered

Sumerian letters that complain uf sickly goats, sheep that had already been

fleeced etc If a seller's reputation was good, individual “backers” or

"bankers" could decide to take the risk of "clearing" a trade The observation

that trust is always required between market participants later led to credit

money But until relatively modern limes, communication and credit were

primitive

But from that time to 1974, trading activities were on chaos so it needed a committee to control activities That’s why the Commodity Future ‘Frading Commission ( CFTC ) was established in 1974 as an independent agency with the mandate to regulate commodily futures and option markets in the United

States The agency's mandate has been renewed and expanded several times

since then, most recently by the Commodity Futures Modernization Act of

2000

Today, the CFTC assures the cconomic utility of the futures markets by

encouraging their competiliveness and efficiency protecting market participants against fraud, manipulation, and abusive trading practices, and by

ensuring the financial integrity of the clearing process Through effective oversight, the CFTC enables the futures markets lo serve the important

function of providing a means for price discovery and offsetting price risk

The CF IC's mission is to protect market users and the public from fraud, manipulation, and abusive practices related to the sale of commedity and

financial futures as well as options, and to foster open, competitive, and financially sound futures and option markets

1.2.4 Benefits of Commodity Future Contract

1.2.4.1 Target customers of the Commodity Future Contract

Up to now, there are three groups only that made Commodity Future Contract with a hope to maximizing their own profit They are: Hedgers,

Speculator and Arhitrageurs

For the Hedgers: These are market players who wish to protect an

existing Commodity Position from future adverse price movements For

example, both producer and consumer of commodity will hedge their

positions in the cash or physical markets using futures contracts And in order

t hedge a position, a market player needs to take an equal and opposite

position in the futures market to the one held in the cash market By using

futures contracts, hedging removes the opportunity to profit, if future cash prices rise but provide the required protection if future cash prices fall In this

respect hedging is in effect an insurance contract which locks in the future

price uf a cummodity Or in other words, Hedgers are usually people who are

interested in owning the commadily They use their futures contracts lo

protect them [ram price changes thal will jeopardize their profit margin If the

prices of a commodity gues up their profit margin is cut unless they raise the

price of the product

For the Speculators: Speculators accept the risk that hedgers wish to transfer Speculators have no position to protect and do not necessarily have the physical resources to make delivery of the underlying commodity nor do they necessarily need tu take delivery ef the underlying commodity They take posilions on their expectations of future price movements and in order to make a profit Speculators provide liquidity to the markets and without them the price protection - insurance — required hy hedgers would be very

expensive

For the Arbitrageurs: These are traders and market-makers who deal in buying and selling futures contracts hoping to make profit from price differentials between bid and ask price

1.2.4.2, Benefits of commodity future contract

In general Commodity Future Contract is a tool to diminish the risk for every one when the price of one commodity fluctuates But in order to specify mere, we can divide inta some parts as follow:

- For buyer and seller : The buyer can avoid the risk in raising the price while the Seller can avaid the risk in reducing the price,

- For the Producer : To avaid reducing the price for the Commodity in

Warehouse when the market is down To avoid offering the selling price in a long time but there is no impact of differentiating the price In order to ensure that there is enough input for production

20

Vor Manufacturing: To fix the input price to offer the selling price in long time with the fixed margin prolit in order lo aveid the risk in price

between bid and ask price

For the Distributor’Business: To avoid the price in the ware house when

the market is down to avoid the bid and ask price, input and out put of the commodity

For Speculators‘Arbitrageurs : Ja gain profit based on the price

differentials between buying and selling products They are the group of

people that trade commodities solely ta make money They are not interested in owning the commodity They hope to make money in the market by betting their money on price moves Speculators often

experience greater risks than hedgers do

For Investors: futures provide them with leverage Leverage is the

ability to use a smaller amount of money to make a larger investment,

Futures contracts provide a person with the ability to buy a certain

amount of that commodity This amaunt varies from commodity to commodity

For Hedgers are usually people who are interested in owning the commodity They use their futures contracts to protect them from price changes that will jeopardize their profit margin If the price of a commodity goes up, their profit margin is cut unless they raise the price

of the product

Moreover, one more benefit or advantage is that, Company can get much

benefit when trading the Future Commodity Market, because :

The financial obligation is low

‘The high financial leverage - margin meehanism

Trading Nexibly — sell short before buy long

- Trading openly for every participants

- Using as a tool to diminish the risk and doing business

- Diversifying the Commodilies

- To have advantage over supervising the Credit and support of the Bank

- To have chances to do business in the spread and price diflerentiation

- Connecting closely the business activities with international market and

having positive price tor the future commodity

- Trading Future Contract combining with trading physical Commodity

will help diminish risk in differentiating price

+ Help the Firm approach the modern trading method in the world while Viet Nam is in powerful integration inte the world

- Sticking the Business activities of the Firm to the international Market

- Trading Commodity Future Contract help the Firm have a thorough

understanding about correct and faster changes of the market

- The Firm will be flexible with the physical price when trading Future

Contract

1.2.5, Issues on developing Commodity Future Contract

1.2.5.1 The Stage of economic development

From the old time, people have arisen the demand to exchange the commodities in order to satisfy the daily essential demand as well as doing

business Together with time, the physical commodily market was more and

more developed and in order to diminish the risk from price differential, the

Chicago Board of Trade has been officially founded by 83 merchants on 3*

April - 1848 with a view to making purchase and sale easily, stably and avoiding monopoly Future market in general and Commodity Future Contract

in particular played an important role in the financial market as wel! as the world's economy because it provided enterprises with important instruments

to avoid risks which they had to face when joining the global commerce and

finanee

As for Vietnam, During the Gme of the centrally planning economy and

bureaueracy, all economic activities were implemented basing on the planning system of the Government, market factors were paid no attention The changes of the Market did not nearly affect operations af the Firms because the manufacture, the consumption, as well as the price were predetermined Therefore, the concepts about the Derivatives as well as Derivatives instruments were not cared and got to know Only when Vietnam has changed

trom the centrally planning economy into the market cconomy from 1986 as

well as destroyed the monopoly in some producls and services, can we see and know them Nowadays, when becoming an official member of WTO, Vietnam

joined the international market as well as the international financial market

Ignper and longer Integrating into international economy will increase the

market factors, thence encourage the economy to develop with these factors,

eness as well as the

lo he fast to react more, encourage the compet

diversification and complication of the international finance market

Moreover, risky factors on the markct grow more and more when integrating

Enterprises are facing many difficulties in doing business, such as: the price of

input, risk in exchange rate so on Therefore, using commodity future contract, enterprises joining financial market can diminish risks, thence increase the efficiency of international capital cirele as well as maintaining the

business belter

However, these will have important effects on managing the macro

economics policy of the Government especially the monetary policy as weil

as its mechanism cle

1.2.5.2.1 General P:

For productservice there are seven price

g Methods

“setting methods to determing

the price before selling to customers They are |:

- Markup Pricing : Used by manufacturers wholesalers and retailers a markup is calculated by adding a set amount to the cost of a product, which results in the price charged to the customer For example, il the cost of the

product is $100 and your selling price is $140 the markup would be $40 To

tind the percentage of markup on cust, divide the dollar amount of markup by the dollar amount of product cost, $40 / $100 = 40%

Markup pricing is used popular because sellers can determine the costs much more easily than they can estimate demand, when all firms in the

industry use this pricing method, prices tend to be similar which can minimize

price competition

- Target - Return Pricing : in setting this price, the firm determines the price that would ensure ils target rate of retum on investment ( ROI] ) Target pricing is used by many firms including General Motors which prices its

automobiles to achieve a 15-20 percent ROI

- Perceived - Value Pricing: an increasing number of companies base

price on customers” perceived valuc They must deliver the value promised by

their value statement and the customer must perecive this value They use the

other marketing mix elements such as advertising, communicating and enhancing perceived value in buyers’ mind

- Value Pricing : Value Pricing is a method whose company charges a fairly low price for a high quality offerig Value pricing is not a matter of

simply setting lower price on products compared to those of competitors

“chapter 13 - Designing Pricing Strategies and Programs A framework for Marketing Management, Second Edition - Philip Kotler

I is a matter of reengineering the company’s operations to become a low cost

product without sacrificing quality and lowering prices significantly to attract

a large number of value conscious customers

- Going Rate Pricing : in setting this price, the firm buses its price largely

on vompelitors' price The firm might charge the same, more or less than its

major competitors’ charges In industries that sell a commodity such as steel paper or fertilizers, firms normally charge the same price The smaller firms usuafly follow the leader, charging their prices when the leader's prices vhange rather than when their own demand or cests change Some firm may charge a stight premium or discount but they typically preserve the amount of

difference When costs are difficult to measure or competitive response is

uncertain, firms adopt the going price because it seems to reflect the

industry's collective wisdom as to the price thal will ensure a fair return and

not jeopardize industrial harmony

- Auction Type Pricing: this price is growing more popular, especially

with the growth of the internet One major use of auctions is to dispose of

excess inventories or used goods Another is to procure goods and services at

lower prices

- Group Pricing : The intemet is facilitating a method whereby consumers and business buyers join groups to buy at a lower price If enough buyers order sufficient quantities for the same shipping date, the price will

drop for all participants

1.2.5.2.2 Pricing Method for Commodity Future Contract

Nis known that, Commedity Future Contract is a financial service with a

view to avoiding the risks from changing the unfavourable price for

Customers.

Therelore, in general it is also priced like other products/services, but it is quite different from other products Commodity Future Contract will be traded

on each contract but each contract will be one lot Therefore every Exchange

uround the world will use ane lot considered as one contract traded on cach

exchange And cach Exchange will stipulate for each lot traded on this exchange For Robusta Coffee trading on Liffee one lot will be 5 tones while

Arabica Coflee wading on Nybot, one lot will be 37300 pounds Far Soybean,

Wheat and Com trading on Coot one lot will be 5000 bushels while trading

Soybean Meal, one lot will be 100 tones For trading Rubber on Tocom, one

lot will be 5000 kilograms Trading Metal on LME Copper Zinc, Lead and

Aluminum, one lot will be 25 tones while one lot Tin will be 5 tones and one

lot Nickel will be 6 tones Trading preciuus Metal on Nymex, one Jot Silver will be 5000 troy ounces Usually the commission is priced based on the traded value of its and each commodity will be priced differently through

differently official members — Brokers at the Exchange The official members

at the Exchange will decide the prices or commissions for each provider like

Security Companies in Vietnam Some officail members at Exchanges are : HSBC - The Hong Kong and Shanghai Banking Corporation, MIF Global,

New Edge, Fortis, Okachi

1.2.5.3 The distribution channels

Distribution is all about getting your product/service to the right people

al the right time with special consideration for profit and effectiveness

Successful marketing does not end when a business has developed a productservice and has found its appropriate target audience with a view to

selling it at the right price

The distribution channel for Commodity Future Contract is Direct

Selling Because Direct Selling is the marketing of products nr services to

consumers through sales tactics including presentations, demonstrations, and phone calls, It is sametimes also considered to be a sale that does not utilize a

“middle man" such as retail outlets, distributors or brokers This is needed where the products value like Insurance, needs more explanation and cannot

be purchased off the shelf,

At ils best direct selling can be an opportunity for individuals to find fulfilment express their entrepreneurial talents and gain financial

independence At its worst, it can became a kind ef pyramid scheme all

transactions of this kind of business are always implemented by Direct on -

site ( based on system ) It is very common knowledge that, the transactions

are similar to those products/services which can be sold directly to the

consumer on - site But for Commodity Future Contract is quite different

from this The buyers / sellers have no rights to place order to buy or sell one product Instead of that, the buyer/seller have to place those orders through a

bank which is providing this kind of business

1.2.5.4 Process in delivering commodity future contract

Commodity Future Contract are traded on Exchanges worldwide Future Contracts share the following commen features including : Standardized,

Traded on an exchange, Open and their prices are published and Organized by

a Clearing house The Clearing house acts as a counterparty lo both sides which provides protection to both sides and allows irading to take place more treely

It is important to remember that a futures contract does not predict

what prices will be in the future It is also impertant to remember that

if a contract is allowed te expire, this means that delivery must lake place under the terms of the contract

Trading on margin

When a Future contract is agreed, the full contract price is not paid

al that time Instead, both counterpartics make an initiak~ good faith”

or margin payment to the Clearing House This initial margin or

deposit is usually only 5-10% of the total contract value - different

exchanges and contracts require different initial margins (he fact that both counterparties deposit initial margin assures the integrity of the contract

All profits and losses are credited to or debited from the

counterparties’ Clearing House aceounts daily Any profits can be

withdrawn but if the losses are such that the initial margin is depleted,

then extra margin - variation margin - is required by the Clearing House

Trading an margin is an example of gearing or leverage Gearing allows market players to make larger trades than could otherwise be afforded

On the trade date The Seller sell the buyer a coffee contract through

If the Cuntract expires, the seller delivers a warrant for the Coffee to the

Above is the process of trading Commodity Future Contract in general and

it is applied for countries having warehouses for deliver the physical

Commodities when the contracts expire But, the transactions are quite

different from the process above because many countries don’ stil] have

warchouses, including VietNam Marcaver, the vast majority of future

contracts don’t Icad to delivery The reason is that the traders usually choose

& close our their positions prior to the delivery period specified in the contracts Close out a positian means entering inta the opposite type of trade

from the original une, Su, when you take the long position, it means that you

buy more than you sell On the first notice day, you have to implement a Opposite transaction with that amount you buy And on the day before the

delivery day of the month, you have ta close the position if you are in the

short positiun by buying the amount you sold before

2.5.5 Specification of the Cammodity Future Contract

‘The purpuse of the Commodity Future contract is to avoid fluctuating

price for enterprises and individuals Although the buyer and seller who don’t

know each other are able to trade commodity with the official regulations from the Exchanges The Exchange will specify in detail some exact nature of

the agreement between them It will specify in detail that commodity, the contract size per contract, quality and quantity, where and when delivery will

be made as well as the Clearing House as the payment mechanism for them

Vhe Exchange will alsn specify the amount of the cammodity that has to

be delivered under each contract This is very important for the Exchange

Because if the contract size is too large, many investors wishing to hedge or wishing to take relatively small positions will be unable to receive it And

vice-versa, if the contract size is too small, trading may be expensive when trading for each contract There fore the correct size for each contract clearly depends on the likely users as well as the risky level to avoid for each commodity when its price fluctuates

Delivery Agreements for commodity future contract are different trom other agreements The delivery months vary from contract to contract and are chosen by the exchange to meel the needs or market participants Many

commodities trading Future Contract, the delivery period is the whole month, such as rubber, Silver, Gold etc

Price Quotes ; the fulure price is quoted in a way that is convenient and

to take and understand Usually, commodities are quoted in US dollars

per contract For instance: Robusta Coffee is US dollars per ton, Arabica Coftee is US Cent per pound, Silver is US cent per troy ounce, etc

30

Daily price movement limits Most of commodities, daily price movement limits or minimum price movements will be specified hy the Exchanges They are able to be cent per bushel, US dollar per ton cent per (roy ounce or cent per pound, ete The purpuse of them is to prevent large price mavement {rem occurring because of speculative excesses However limits can become an artificial barrier to trading when the price of the

underlying commodity is changing rapidly

1.2.8.6 People

As you see, in order to sell products or services, the sale men have lo have enough knowledge and skills of the field they sell In this case of

Commodity Future Contract distributed by directed sale or personal selling so

in order to sell this service, the sale man has to have full knowledge about

derivatives in general and Commodity Future Contract in particular The sale

man has to answer all questions about this field from customers and show them the need that customer shouid use this financial tools to avoid the risks when they are doing business as a tool to protect the price from changing suddenly During the time introducing to customers, the sale men can both

place order for the customers and introduce the product / service as well as give customers advice because most of customers don’t understand or know less about derivatives in general and Commodity Future Contract in particular

Moreover, ail over the world derivatives market in general and Commodity

Future Contraet in particular are the financial tool for enterprises and

individuals to avoid price differential, but it is also a tool to gamble

Therefore the sale man should have clear attitudes about this service when introducing to customers

1.2.6, Overview of the development af commodity future contract in

Vietnam

From 2005 to now, by joining WTO - Vietnam is facing many

challenges and oppertunities This asks for more effective loals to avoid risks

in the financial markets with a view to protecting enterprises when joining the huge market with many changes of exchange rates, interests as well as the price of commodities With those purposes, the Government and the State Bank of VictNam have agreed for Techcombank to be the first bank offering

future contracts for price hedging in the commedities market nation-wide

from September 2004, becoming the first financial institution in Viet Nam to

be provided this service

Tugether with the development of the country, the demand for avoiding financial risks increases more and more and in order to avoid the monopoly of

Vechcombank in providing this service, the State Bank of Vietnam has agreed for (wo more banks to be provided this service, inuluding : Bank for

Investment and Development of VietNam (BIDV)and VictcomBank from

the price for gasoline und vil products Moreover, one more new commodity

fulure contract is trading in Vietnam, il is the transaction of “gold” Some

Banks offering this service are ACB - Asian Commercial Bank, VIB -

Vietnam International Bank and VAB - Vict A Bank

Chapter 2 Analyzing the marketing situation of

Techcombank’s Commodity Future Contact Business

2.1 Overview of Techcombank

2.1.1 Introduction about Techcombank

Techcombank, was established on 27" September 1993, one of the largest

and fastest growing full service joint-stock banks in Vietnam Headquartered

al 70-72 Ba Trieu Str, Hoan Kiem Dis, Hanoi, up to now it had upened more

(han 200 branches and transaction offices in over 30 provinces and cities throughout Vietnam after 15 years of operation, aiming to reach the target of

240 branches countrywide by 2010

And naw, Techcombank had charted capital af more than VND $,000

billions VND, total assets of VND more than 59.000 billions, and a total staff

over 3,860 thousands In terms of total assets and revenues, our annual growth

rate has been more than 30% over the last four years Every person or organization doing business with Techcombank has access to our extensive range of banking products and services, provided by a friendly, trained and efficient staf and fully supported by the automatic and customized features of

our on-line Globus System Techcombank, now services nearly 400,000

individual customers For these customers, Techcumbank provides a full

range of products and services to meet the particular needs of this customer group at various stages in their lives, and includes demand deposit accounts, savings loan, payments, credit and debit cards, investment, guarantees and sale custody facilities Its key products and services for these customers are cards consumer loans and house mortgage Techcombank is also providing iis comprehensive range of services to over 20,000 Small to Medium Enterprises (SMEs) throughoul Vietnam The services include accounts, term