FINANCE FOR INTERNATIONAL BUSINESS FINAL ASSIGNMENT

Tài chính trong kinh doanh quốc tế là một trong những nghiệp vụ đỉnh cao của doanh nghiệp khi đầu tư, kinh doanh trên toàn cầu. Trong tài liệu này, sẽ giúp chúng ta có cách nhìn bao quát về tác động của tỷ giá hối đoái lên doanh thu, lợi nhuận của doanh nghiệp. Cách áp dụng các công cụ bảo hiểm tỷ giá để giảmhạn chế sự biến động của tỷ giá

COURSE CODE:

COURSE TITLE:

FINANCE FOR INTERNATIONAL BUSINESS

Students:

ID:

Lecturer:

UBIS INTAKE 5: 2013– 2014

APRIL 2014

Optimal financial strategy for import shipments of company ANL

Submitted by:

Viet Nam April 09, 2020

TABLE OF CONTENT

Introduction 3

Business overview 3

Country overview 4

Scope of import 6

Macro – financial issues and measure 7

Foreign exchange exposures 10

Conclusion 11

References 12

LIST OF FIGURES Figure 1: PEST analysis about China 4

Figure 2: L/C process 5

Figure 3: Deposit interest rate table in VND and USD Date 04/07/2014 7

Figure 4: Forward price VND/USD date 04/07/2014 8

Figure 5: Exchange rate of VND/USD 5 year later 9

INTRODUCTION Due to competitive pressures, ANL Company was founded with the mission to provide a method of selling new, with a new customer segment This is a segment has huge potential, expected revenue of about $ 66 million in 5 years The company intends to import large quantities of goods from China to serve the business However, the issue of concern is the risk of this market: policy risk, exchange rate risk, quality risk, risks territorial disputes with Vietnam How does?

Please keep track the next section to more clearly

BUSINESS OVERVIEW After 3 months of research and consideration, getting the advice from experts in consumer installment payment, the CEO has proposed a new project, expanding the company platform ANP That project focuses on telecommunications business installment payment, customer segments workers in the industrial zone, products is on average, approximately equal to one month's income workers Since this is a new field, to minimize the risk of brand, CEO proposed to establish a new company for this project, named ANL Company, 100% of the equity of ANP

Who is ANP?

ANP Company is a 3rd largest company in Vietnam in terms of manufacturing, distribution and sales in the field of telecommunications: mobile phone, tablet, computer The market has been a fierce competition by the formidable opponents as Nguyen Kim, Mobile World, FPT store (top five of Viet Nam on sale details mobile phone) In particular, the new trend now is installment sales The opponents were quick links with the company for consumer installment loans leading in Vietnam such as PPF, ACS, SGVF (top three on installment sale

in Viet Nam) Facing the risk of losing market share, BOD has requested CEO to study business strategies that best suited for ANP The challenges that CEOs face:

- The strategy must be consistent with the new consumer trends globally installment sales

- It will become a go later if also linked with the giants of consumer installment PPF, ACS and HD Finance

- The company is losing market share

- Must find a new way of sales, new customer segments and less cost, both efficiency and potentially a global reach

Full name of new company: ANL Trading and Service Joint Stock Company

Location (place of operation): Long Hau Industrial zone, Can Giuoc district, Long An province Target customers are 30,000 workers in Long Hau Industrial zone, and the owner has available facilities, the commercial advantages, should be the first step, office business located here

Vision: Consumers supply solution for workers in industrial zone In 5 year next, supply at

50 industrial Zone, with 100,000 customers

Mission: create the best value for myself

How to perform: to give society the highest satisfaction with the goods, services, solutions and by using quality of service

Market segmentation: step 1, about 5 years, focus to workers in Long Hau industrial zone, after that, if the operator successfully can expand into the supply chain to serve its own customers - workers, with more than 200 point nationwide (according[ CITATION Ngo13 \l 1033 ], to June 2013, Vietnam has more than 332 industrial parks and economic zones of border, coastal, not including industrial clusters) and can apply the same model to countries outside Vietnam Revenue estimated of the value chain is about VND 1,400 billion # USD 66.3 million

COUNTRY OVERVIEW Strategy product of ANL only supply goods with price corresponds to the average income of workers, ie, currently around VND 2.5 - 4 million With mobile products, price as above but still meet the trend of used goods market (smart phones, strong configuration, watch online music, web surfing, social networking …[ CITATION Nha13 \l 1033 ]) This is a major concern

of CEO finally the Chinese market is a best choice to import

But the problem is that the risks and advantages to choosing imported goods from China is what?

Figure 1: PEST analysis about China

Item Content Opportunity Thread

Policy -Communist Party China

leaders throughout

-There have been laws:

Foreign Trade Law of The People's Republic of China

[ CITATION the06 \l 1033 ]

High tax rates (VAT: 13% 17% consumption tax: 1% -40%)

-Stabilization policies, laws -Convenient in understanding, consideration and agreement, and to sign the contract of sale

-Corruption, bureaucratic and authoritarian

-Increasing the price of exports Economic -2nd World GDP: 8.22 -Stability, self- -Easily lead to

trillion [ CITATION Wor13 \l

1033 ]

-Inflation rate <6% from

2000 – 2014 -Grow rate average 10%

from 2000 to 2013

[ CITATION Way14 \l 1033 ]

-China is considered the world's factory The proportion of the electronics industry has always

accounted for over 30% of the total trade value In

2009, the value of the electronics industry about $

772 billion [CITATION Isril \l

1033 ]

-Commodity prices and quality are low

control policy in world trade -Low inflation, high GDP growth helped China companies better competed on price in the world

-We can find all electronic components in China

-Only sold to subjects with low income, less money

monopolies, which are detrimental to other countries -The company's brand will be remembered towards as sales China’s goods, cheap, low quality

Social -There are cultural

similarities with Vietnam

-There are disputes over the sea, islands with Vietnam, if not controlled can lead to unpredictable consequences -China's expanding strategic military and political relations in the economic position This caused a lot

of territorial disputes with Japan, South Korea, Philippines, Russia, India

-Convenient ways of thinking and doing with the Chinese traders

-Significant credibility in trade relations

-If one disputes beyond the control loop, the Chinese traders will probably increase in trade with Vietnam

-Not yet professional, heavily rituals

-The bad object able to capitalize this thing to prepare contracts with many vague terms, detrimental

to the company -Might stop supplying goods to the company suddenly, or Chinese partner unreasonable price increases

-There may be psychological boycott Chinese goods

-But it may be spiral of conflict involves, resulted

in scarce goods … Technology -System communication -Convenience contact

and

transportatio

n

technology of China quite modern

-There are road systems (with more than 1,400 km common border),

waterways, airways close and mounted to Vietnam

information

-Very handy for cargo and can use more flexible modes

of transportation

SCOPE OF IMPORT The company will have different strategic commodities for each period respectively The current period, ANL Co just stopped scale domestic and imported components and finished products assembled in Vietnam and redistribution of customer targets

Due to new trade deals with Chinese partners, to minimize risks in the international payment process, the first time, the company will use the method of documentary credit (L/C) Import process as follows:

Figure 2: L/C process

3 7 9

1 5

The interpretation process:

Step 1: a sell contract sight by the importer with exporter The main condition:

Goods: mobile phone accessories

Time of delivery: in next 2 months and 3 week, ie from 15/04/2014 to 08/07/2014

Time of payment: next 3 months, at 15/07/2014, in a week from get documents day

ANL company/import Huawei/export

Total value: $500,000.00

Delivery methods: CIF any port in HCMC, Viet Nam

Step 2: ANL require HD Bank made a L/C import

Step 3: HD Bank sent L/C opened to CNBC, the bank of Huawei

Step 4: CNBC notice the L/C with Huawei, if ok, go to step 5

Step 5: after 2 months and 3 week, Huawei send goods to ANL

Step 6: Huawei send all document of export goods to CNBC, to claim the money or

discounting of export documents

Step 7: CNBC send all documents to HD Bank, and require payment

Step 8: HD Bank notice to ANL and deduct money from account ANL to pay for CNBC, and climate bill signing, delivery of documents for delivery ANL

Step 9: HD Bank reported on account the CNBC

Step 10: CNBC reported on account the Huawei

This approach is safe in international trade, but its drawback is the high transaction costs

[ CITATION Cre99 \l 1033 ] Later, when established reputation, ANL can deal with Huawei methods other than lower cost, as TTR postpaid, DP, DA

MACRO-FINANCIAL ISSUES AND MEASURE There are many macro factors can affect the VND / USD, which led to the financial risk for ANL Four typical problems are as follows:

Disputed islands of Vietnam with China, if that happens, foreign investors will quickly withdraw from Vietnam, which leads to VND supply and demand USD suddenly increased Meanwhile, VND will depreciate against the dollar enormous, and this means that ANL would cost more to pay when due Huawei L/C

If Vietnam successful TPP agreement (The Trans-Pacific Partnership Agreement

[ CITATION Cre11 \l 1033 ]) There are so many foreign investors to invest in Vietnam to enjoy preferential import and export rates prescribed by the TPP Meanwhile, the dollar supply and demand VND will rise significantly, this means that ANL would cost less to pay when due Huawei L/C

Territorial disputes of China and Japan: if this escalates beyond control, the Japanese company will move to invest in Vietnam When that will impact increases dollar supply and demand for VND When that VND will appreciate against the USD, ie ANL will benefit

If Vietnam's inflation to rise about 12% in 2014, while GDP growth is about 5.6% This will make the VND depreciating currencies have lower inflation, higher economic growth, which has USD When, the financial risk will appear in the financial statements of ANL

In four issues raised above, the problem is the 2nd and 3rd is happening, we strongly impact

of macroeconomic Vietnam And this will benefit the VND price increase / or limited decrease speed value against the dollar According to the governor of the State Bank of Vietnam, the VND/USD in 2014 will be stable, if the change is less than 2%.[CITATION Hon14

\l 1033 ]

The relevant issues:

ANL Co used its own capital (VND) to pay for the L/C opened But the question is:

Deposit interest rates of VND and USD 3 months like?

Exchange rate of VND / USD 3 months will be like?

Analysis clearly two issue above, we will have an optimal financial strategy for ANL

Bases the deposit interest rates listed of HD Bank, 3-month period of VND 7.5% /year, of USD 0.5%/year => 3 month gap deposits of VND against USD is 7% / year

Figure 3: Deposit interest rate table in VND and USD Date 04/07/2014

Sources: HD Bank Based on the forward rate expressions listed, we can see the spot rate VND/USD is 21,110.00, 3-month forward rate is 21,237.00 => ie 3 months later, USD appreciated 0.6% against the VND

As usual Viet Nam, to forward purchase contract, ANL must deposit (non interest) 3% on the total value of the forward contract, # U.S $ 15,000.00, # VND 316,650,000.00 ANL losses due to non-interest margin is VND 5,937,188 #0.056% (=5,937,188/(500,000*21,110)) Total cost if the 3-month forward contract is 0.656%

Figure 4: Forward price VND/USD date 04/07/2014

Sources: Techcombank

Thus, the optimal financing strategy for the L/C is:

Saving deposit VND, the 3-month period, the due date is the date of payment L/C (07/15/2014)

Purchase forward contract of USD 3-month period, the date the contract is the date of payment L/C

This business strategy known as covered interest arbitrage (CIA)

It is stated as follows: general principles, the spot rate and the forward rate corresponding to equilibrium interest rate of 2 that currency If for any reason that it is not balanced, then we can do business and make profits, business is called covered interest arbitrage [ CITATION Dav04 \p 6-23 \l 1033 ]

Calculation of efficiency:

If the CIA does not apply, ie buy dollars spot at the time of signing the contract, savings deposits 3-month period, the time limit for payment on the day of payment L/C, known as Option 1:

Value 500,000 USD

forward 3 month 21,237

VND/

USD Interest rate USD 0.50% 1 year 0.04%

mont h Interest rate VND 7.50% 1 year 0.63% month

term 3 month

Option 1 PV 499,375.52 USD

10,536,823,481.9

Option 2 PV

10,421,866,152.7

Costs margin for forward contract

5,937,18

8 Efficacy:

(109,020,141.16 ) Option 2 save more than option 1 # VND 109 million

FOREIGN EXCHANGE EXPOSURES

Figure 5: Exchange rate of VND/USD 5 year later

Sources: Vietnam's central bank

As the chart shows, in the past 5 years, from April/2009 to April/2014, the VND/USD has increased from 16,938 to 21,036, equivalent, 24.19% However, the exchange rate from 03/03/2011 to present time quite stable, varying from 20.685 to 21,036, # 1.7% Thus, for more than 3 years from 3/2011 to 4/2014 rates increased only 1.7%, which is a positive signal to businesses wishing to pay in USD

According [ CITATION Hon14 \l 1033 ], rate in 2014 is expected to be stable, not fluctuating more than 2% The information to support this claim is: foreign exchange reserves of Vietnam reached $ 32 billion # 12 weeks of imports, the largest ever; FDI, FII, ODA continues to increase; is the 2nd consecutive year trade surplus; inflation was controlled at one of number

Analyzing historical and trends show that the VND / USD in 2004 is quite stable, however to ensure risk, ANL need to implement hedging by buying forward contracts of USD 3 month implementation date contract on the day of payment L / C Buy 3 month forward exchange rate is listed as 21.237 VND / USD Contract performance to date, ANL will be buying dollars for the signed

Also need to say more about forward contract, according [ CITATION Fre12 \p 591 \l 1033 ]:

“Interest-rate forward contracts involve the future sale or purchase of a debt instrument and have several dimensions: (1) specification of the actual debt instrument that will be delivered

at a future date, (2) amount of the debt instrument to be delivered, (3) price (interest rate) on the debt instrument when it is delivered, and (4) date on which delivery will take place” And, the advantage of forward contracts is that they can be as flexible as the parties involved want them to be This means that an institution may be able to hedge completely the interest-rate risk for the exact security it is holding in its portfolio

CONCLUSION The macroeconomic policies of Vietnam began promoting positive effect The basic indicators such as inflation, interest rate, balance of payments, foreign exchange reserves are stable and good development trend Exchange rate of VND / USD steady over the past 3 years, this trend will continue at least up to 2014 Forward exchange rate and the spot rate is the difference, enabling business CIA

To ensure the financial risk for ANL in the payment L/C above while creating the highest financial performance, financial strategy is proposed:

Purchase forward contract for 3-month USD

Business the interest differential (CIA)