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Banking and Finance 201

MANAGEMENT OF EXCHANGE RATE RISK IN EXPORT-IMPORT


COMPANIES IN VIET NAM

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Table of Contents
Table
of
Figures..
4
INTRODUCTION
.....5
CHAPTER I: OVERVIEW OF EXCHANGE RATE RISK AND MANAGEMENT OF
EXCHANGE RATE RISK............................................................................................. 6
A.

Literature of exchange rate risk....................................................................6


1.

Definition of exchange rate risk.................................................................6

2.

Causes of exchange rate risk.....................................................................6

3.

Classification of exchange rate risk...........................................................8

B.

Management of exchange rate risk...............................................................9


1.

Roles of management of exchange rate risk..............................................9

2. Factors affecting exchange rate risk management policy in export-import


companies........................................................................................................ 9
C. Experiences of exchange rate management of some countries.................10
1.

Halliburtons success of exchange rate risk management program........10

2.

Experiences in managing exchange rate risks in developed countries....10

CHAPTER II: SITUATION OF EXCHANGE RATE RISK AND MANAGEMENT OF


EXCHANGE RATE RISK IN VIETNAMS EXPORT-IMPORT COMPANIES (2007-2013). .12
A.

Situation of exchange rate risks in Vietnam export-import enterprises......12


1.

Situation of exchange rate and export-import activities in Vietnam........13

2. Assessment of exchange rate risks suffered from by export-import


enterprises..................................................................................................... 20
B. Situation of exchange rate risks management in export-import companies
in Vietnam......................................................................................................... 23
1.

Limitations of exchange rate risks management of export-import..........24

2.

Causes of limitation in exchange rate risk management.........................25

CHAPTER III: RECOMMENDATION: HOW TO MANAGE EXCHANGE RATE RISK IN


EXPORT-IMPORT COMPANIES IN VIETNAM.............................................................28
A.

Impacts of movements in foreign exchange rates on businesses...............28


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1.

A fall in domestic exchange rate..............................................................28

2.

A rise domestic exchange rate................................................................29

B.

Methods applied to export-import enterprises............................................29


1.

Forward exchange contract:....................................................................30

2.

Foreign currency options:........................................................................30

3.

Foreign exchange Forward Hedges:.........................................................31

4.

Foreign exchange Options Hedges:.........................................................31

5.

Foreign currency bank accounts / loan facilities:.....................................31

C. Management of foreign exchange risk in four steps...................................32


1.

Step 1. Identify and measure foreign exchange exposure.......................32

2.

Step 2. Develop your Companys foreign exchange policy......................32

3.

Step 3. Hedge exposure using trades and/or other techniques...............32

4.

Step 4. Evaluate and adjust periodically..................................................32

D. Establishing management system in Export-Import Vietnamese business. 33


1.

Monetary Policy Management..................................................................33

2.

Foreign Exchange Management...............................................................35

3.

Legal activities......................................................................................... 37

CONCLUSION.................................................................................................... 39
References:...................................................................................................... 40

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Table of Figures
Graph 1 : Exchange rate fluctuation in the period 2008-2013.........................................11
Graph 2 : Export-import turnover growth in the period 2006-2013.................................12
Graph 3 : Export-import turnover of specific products in 2008........................................13
Graph 4 : The exchange rate growth rate in 2012.............................................................14
Graph 5 : Export-import turnover in the period 2012-2013..............................................15

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INTRODUCTION
Exchange rate risk management is an integral part in every firms decisions about foreign
currency exposure (Allayannis, Ihrig, and Weston, 2001). Currency risk hedging strategies
entail eliminating or reducing this risk, and require understanding of both the ways that the
exchange rate risk could affect the operations of economic agents and techniques to deal with
the consequent risk implications (Barton, Shenkir, and Walker, 2002). Selecting the
appropriate hedging strategy is often a daunting task due to the complexities involved in
measuring accurately current risk exposure and deciding on the appropriate degree of risk
exposure that ought to be covered. The need for currency risk management started to arise
after the break down of the Bretton Woods system and the end of the U.S. dollar peg to gold
in 1973 (Papaioannou, 2001). The issue of currency risk management for non-financial firms
is independent from their core business and is usually dealt by their corporate treasuries. Most
multinational firms have also risk committees to oversee the treasurys strategy in managing
the exchange rate (and interest rate) risk (Lam, 2003). This shows the importance that firms
put on risk management issues and techniques. Conversely, international investors usually, but
not always, manage their exchange rate risk independently from the underlying assets and/or
liabilities. Since their currency exposure is related to translation risks on assets and liabilities
denominated in foreign currencies, they tend to consider currencies as a separate asset class
requiring a currency overlay mandate (Allen, 2003). This paper reviews the standard
measures of exchange rate risk, examines best practices on exchange rate risk management,
and analyzes the advantages and disadvantages of various hedging approaches for firms. It
concentrates on the major types of risk affecting firms foreign currency exposure, and pays
more attention to techniques on hedging transaction and balance sheet currency risk. It is
argued that prudent management of multinational firms requires currency risk hedging for
their foreign transaction, translation and economic operations to avoid potentially adverse
currency effects on their profitability and market valuation. The paper also provides some data
on hedging practices by U.S. firms. The organization of the paper is as follows: In Section I,
we present a broad definition and the main types of exchange rate risk. And we outline the
main measurement approach to exchange rate risk (Var). We review the main elements of
exchange rate risk management, including hedging strategies, hedging benchmarks and
performance, and best practices for managing currency risk. In Section II, we reveal the
situation of exchange rate risks in Vietnams export-import companies as well as the
limitation in managing exchange rate risk here. In Section III, we conclude by offering some
general recommendation for managing exchange rate risk in Vietnams export-import
companies.

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CHAPTER I: OVERVIEW OF EXCHANGE RATE RISK AND


MANAGEMENT OF EXCHANGE RATE RISK
a. Literature of exchange rate risk.
1.1.1.

Definition of exchange rate risk

Exchange rate risk is the risk of an investment's value changing due to changes in currency
exchange rates; the risk that an investor will have to close out a long or short position in a
foreign currency at a loss due to an adverse movement in exchange rates and also known as
"currency risk" or "exchange-rate risk".
1.1.2.

Causes of exchange rate risk

Numerous factors determine exchange rates, and all are related to the trading relationship
between two countries. Exchange rates are relative, and are expressed as a comparison of
the currencies of two countries. The following are some of the principal determinants of the
exchange rate between two countries. Note that these factors are in no particular order; like
many aspects of economics, the relative importance of these factors is subject to much debate.
1.

Differentials in Inflation

As a general rule, a country with a consistently lower inflation rate exhibits a rising
currency value, as its purchasing power increases relative to other currencies. During the last
half of the twentieth century, the countries with low inflation included Japan, Germany and
Switzerland, while the U.S. and Canada achieved low inflation only later. Those countries
with higher inflation typically see depreciation in their currency in relation to the currencies
of their trading partners. This is also usually accompanied by higher interest rates.
2.

Differentials in Interest Rates

Interest rates, inflation and exchange rates are all highly correlated. By manipulating
interest rates, central banks exert influence over both inflation and exchange rates, and
changing interest rates impact inflation and currency values. Higher interest rates offer lenders
in an economy a higher return relative to other countries. Therefore, higher interest rates
attract foreign capital and cause the exchange rate to rise. The impact of higher interest rates
is mitigated, however, if inflation in the country is much higher than in others, or if additional
factors serve to drive the currency down. The opposite relationship exists for decreasing
interest rates - that is, lower interest rates tend to decrease exchange rates.

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3.

Current-Account Deficits

The current account is the balance of trade between a country and its trading partners,
reflecting all payments between countries for goods, services, interest and dividends.
A deficit in the current account shows the country is spending more on foreign trade than it is
earning, and that it is borrowing capital from foreign sources to make up the deficit. In other
words, the country requires more foreign currency than it receives through sales of exports,
and it supplies more of its own currency than foreigners demand for its products. The excess
demand for foreign currency lowers the country's exchange rate until domestic goods and
services are cheap enough for foreigners, and foreign assets are too expensive to generate
sales for domestic interest.
4.

Public Debt

Countries will engage in large-scale deficit financing to pay for public sector projects and
governmental funding. While such activity stimulates the domestic economy, nations with
large public deficits and debts are less attractive to foreign investors. The reason? A large debt
encourages inflation, and if inflation is high, the debt will be serviced and ultimately paid off
with cheaper real dollars in the future.
In the worst case scenario, a government may print money to pay part of a large debt, but
increasing the money supply inevitably causes inflation. Moreover, if a government is not
able to service its deficit through domestic means (selling domestic bonds, increasing the
money supply), then it must increase the supply of securities for sale to foreigners, thereby
lowering their prices. Finally, a large debt may prove worrisome to foreigners if they believe
the country risks defaulting on its obligations. Foreigners will be less willing to own securities
denominated in that currency if the risk of default is great. For this reason, the country's debt
rating is a crucial determinant of its exchange rate.
5.

Term of Trade

A ratio comparing export prices to import prices, the terms of trade is related to current
accounts and the balance of payments. If the price of a country's exports rises by a greater rate
than that of its imports, its terms of trade have favorably improved. Increasing terms of trade
show greater demand for the country's exports. This, in turn, results in rising revenues from
exports, which provides increased demand for the country's currency (and an increase in the
currency's value). If the price of exports rises by a smaller rate than that of its imports, the
currency's value will decrease in relation to its trading partners.
6.

Political Stability and Economic Performance

Foreign investors inevitably seek out stable countries with strong economic performance in
which to invest their capital. A country with such positive attributes will draw investment
funds away from other countries perceived to have more political and economic risk. Political
turmoil, for example, can cause a loss of confidence in a currency and a movement of capital
to the currencies of more stable countries.
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1.1.3. Classification of exchange rate risk
Multinational firms are participants in currency markets by virtue of their international
operations. To measure the impact of exchange rate movements on a firm that is engaged in
foreign-currency denominated transactions, the implied value-at-risk from exchange rate
moves, we need to identify the type of risks that the firm is exposed to and the amount of risk
encountered. The three main types of exchange rate risk that we consider in this paper are:
Transaction
risk

Types of
exchange rate
risk

Translation
risk

Economic
risk

3.1 Transaction risk


Which is basically cash flow risk and deals with the effect of exchange rate moves on
transactional account exposure related to receivables (export contracts), payables (import
contracts) or repatriation of dividends. An exchange rate change in the currency of
denomination of any such contract will result in a direct transaction exchange rate risk to the
firm.

3.2 Translation risk


Which is basically balance sheet exchange rate risk and relates exchange rate moves to the
valuation of a foreign subsidiary and, in turn, to the consolidation of a foreign subsidiary to
the parent companys balance sheet. Translation risk for a foreign subsidiary is usually
measured by the exposure of net assets (assets less liabilities) to potential exchange rate
moves. In consolidating financial statements, the translation could be done either at the endof-the-period exchange rate or at the average exchange rate of the period, depending on the
accounting regulations affecting the parent company. Thus, while income statements are
usually translated at the average exchange rate over the period, balance sheet exposures of
foreign subsidiaries are often translated at the prevailing current exchange rate at the time of
consolidation

3.3 Economic risk


Economic risk reflects basically the risk to the firms present value of future operating cash
flows from exchange rate movements. In essence, economic risk concerns the effect of
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exchange rate changes on revenues (domestic sales and exports) and operating expenses (cost
of domestic inputs and imports). Economic risk is usually applied to the present value of
future cash flow operations of a firms parent company and foreign subsidiaries. Identification
of the various types of currency risk, along with their measurement, is essential to develop a
strategy for managing currency risk.

b. Management of exchange rate risk


1. Roles of management of exchange rate risk
Management of exchange rate risk plays an important role in a company because it affects
directly to the profit. If businesses have appropriate programs in exchange rate risk
management, it will help to protect and contribute added value for business through limiting
the damage they can face. Besides that, it will help to control the company consistently,
allocate the resources and above all maximize the profit.
In specification, the roles of managing exchange rate risk are shown in these aspects:
- The competitiveness in price, service is maintained and improved, especially in
exported products and imported product which made from imported materials.
- The targets in revenue, profit are maintained and can meet the investors need. Besides
that, the stability of revenue will help to increase the value of share, increase the value of
business. More than that, it will help business in capital mobilizing with low cost, thence
operate effectively.
- Making it easy for business to plan policies in funding and investment, take advantages
all opportunities to do business.
- Taking advantages in some favorable changes in the market.
- Planning for future policies in international market.
2. Factors affecting exchange rate risk management policy in export-import
companies.
- The size of enterprises: play an important role in calculating cost in risk management. It
includes all fixed costs for setting technology and hiring employee to manage the risk. Large
enterprises can be a good customer for long-term investment, it will help to reduce the cost for
risk management.
- Lever using: Enterprises have high level of using lever will have low cost and low
ability to bankrupt them financially.
- Liquidity and profitability: These enterprises with high liquidity and profitability do not
have to spend much in risk management because they are hard to be in financial trouble.

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- Growth rate: this number is a key factor in risk management. Good policies in risk
management will help enterprises to be independent in finance, maintain the growth rate in
long-term.

c. Experiences of exchange rate management of some countries


1. Halliburtons success of exchange rate risk management program
Halliburton is one of the leading companies in the USA majoring in supplying
technological, constructive and maintenance devices. With a variety of products, the company
operates to provide measures to solve
problems
relating
to
energy,
technology and service.
Being a universal-scaled company
with more than 360 agents and
branches in all over the world, the
company is always confronting with
risks doing transactions in foreign
currency in large scale every day. In
1995, a system of business risk
management called EPAM was
developed in order to manage the
fluctuation of exchange rate (ER)
which
included
projects
and
assessment methods aiming at
controlling the risks in the foreign
currency as well as in the companys transactions. The system is comprised of 3 main
departments divided basing on the functions of collecting, settling and summarizing the
identification of risks and the solutions; along with this is the process of training high-quality
labor force in the field of managing financial risk management.
In conclusion, the risk of exchange rate in Halliburton was taken into control efficiently,
perceived timely thanks to up-to-date financial news and high-qualified labor force. The
advantage that the company gained is to mitigate the damages caused by disadvantageous
change in exchange rate as well as to reduce the losses significantly. The company
immediately expanded the system to all the other agents and branches in all over the world.
2.

Experiences in managing exchange rate risks in developed countries

2.1. In India
The transformation from fixed ER regime to floating ER regime as well as the
development of derivative tools in India followed the process of liberalizing the India
Economy in 1992.
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*Development of derivative instruments
The economic liberalization in India at the beginning of the 1990s did help to launch
derivative tools basing on interest and foreign currency. ER was floated in 1993. In 1994,
Rupii was totally transformed in current accounts. The ban of transaction of future shipments
did start 10 years ago. In October 2007, even all the companies were permitted to make
contracts though the risk was high.
Derivative tools of stock index and private stock also developed rapidly. In specific,
transaction of future stock became quite popular. The investors were the ones who were
interested in the over the counter (OTC) stock market where all the contracts of forward
exchange currency and swap contracts developed well. The instruments of forward foreign
exchange were not as popular as interest derivative instruments though they appeared longer.
The instruments in the OTC such as foreign currency forwards and swaps are the most
common types. Exporters and Importers and Banks used swaps towards Rupii to prevent ER
risks.
*Management of exchange rate of Indian businesses
The period 2006-2007 observed the drastic fluctuation in the rate between USD and Rupii
(INR) in the scene of financial crisis exploded in the USA and the USD flow rushed into
Indian stock market. According to a survey about the use of derivative instruments in some
companies in India, it is seen that most of the profit of such businesses come from USD,
EUR, GBP because they mainly make transactions with such foreign currency. Forward
contracts are usually used by most businesses. Except for some businesses such as Ranbaxy
and Ril depends mainly on this contract in order to avoid risks. As mentioned above, forward
contracts can meet the demand of businesses.
RIL, Maruti Udyog and Mahindra are the only companies that uses swap contracts
of foreign currency exchange. The use of swaps as a hedging strategy in the long term is often
used by businesses with large capital and long-term planning for the future.
Another result is that some companies like TCS prefer hedging risks by using instruments
of options to forward contracts. This is an emerging trend recently in India while the USD /
INR has got strong fluctuation. Choosing right is the tool that can bring about unlimited
profits to participants; whereas, using forward contracts, the companies might be lost partially
if the exchange rate volatility is not as expected.
2.2. Management of ER risks of multinational companies in the Latin America
During the 1990s, the capital of foreign direct investment into Latin America increased
significantly; from $ 6 billion in 1990 to US $ 85 billion in 1999. 80 % of this fund
concentrated on Argentina, Brazil, Chile and Mexico. Though financial risk and exchange rate
risks management has only become a basic problem to settle for about 20 years, the
multinational companies in the developing countries sought to manage the risks long time
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ago.
Latin American countries are inherently unstable with high inflation rates and the regular
monetary crisis. A common method of hedging risks is booking the capital assets and
liabilities with the same currency, from which the payments and clauses can compensate for
each other, eliminating ER risks.
Another way to prevent ER risks is using the prevention lists. By this way, companies
manage a diversified portfolio of foreign currency inflows, portfolio itself helped to prevent
ER risks. This is the case of the multi-companies in the countries whose products and goods
are distributed in different geographical regions, different countries.
Thanks to the development of the international financial system during the 80s and 90s,
most companies have adopted risk management tools such as swaps new, term ,
option, also known as derivative instruments. Meanwhile, the multinational companies in
Latin America have tried to negotiate derivative contracts with local countries for a cheaper
price. However, they have to face many limitations because the market has not developed
much (the market is only active within the last 7-8 years).
One of the incentives for this market is the huge capital flows from multinational
companies when the service areas are privatized. The process begins when multinational
companies come and invest, followed by the demand for foreign currency loans and then the
derivative instruments to hedge ER risks.
Brazil is an exception, a legal framework for the market of derivative instruments in the
America Latin is still very weak. For example, non - delivery forward contracts in Chile were
deemed illegal until 2001. In the case of Argentina, in 2003, Congress was still arguing about
the legal environment for market of derivatives. Also in 2003, in Mexico there was a reform
of legislation that allowed local and foreign banks to become market makers. While
derivatives market developed well in the US, in Latin America, until 2003, Brazil is a country
having the fullest derivatives instruments. In Mexico, the derivatives instruments in OTC
markets including foreign exchange options, securities and swaps were also present. In such a
weak market as Peru, only non-delivery forward contracts were implemented, while in
Bolivia, no derivatives instruments existed.
This is the reason why the extensive development of the local financial market is essential
for multinational companies. On the other hand, because of fragility of the derivatives market
in Latin America, the derivative tools become more expensive and sometimes make the
enterprises not reach the stage of high demand. Managing ER risks made by multinational
companies not only depend solely on exchange rate policy but it also involves the
identification of the policy and other variables of macroeconomics.

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CHAPTER II: SITUATION OF EXCHANGE RATE RISK AND
MANAGEMENT OF EXCHANGE RATE RISK IN VIETNAMS
EXPORT-IMPORT COMPANIES (2007-2013)
A. Situation of exchange rate risks in Vietnam export-import enterprises
Exchange rate risk in export-import activities is usually encountered and concerned about
by enterprises with strong export-import activities. The change in the foreign exchange rate in
comparison with domestic currency results in the change in expected value of revenues and
expenses in the future which affect relatively the efficiency of export-import activities.
1. Situation of exchange rate and export-import activities in Vietnam
1.1. Impact of exchange rate fluctuation on export-import activities
Exchange rate is a kind of price, like all other type of prices, the mechanism of impact of
exchange rate on export-import activities is carried out according to the interaction between
demand and supply for commodities and export-import services using current exchange rate
in the market.
Exchange rate and exchange rate fluctuation have direct influence on the price level of
goods export-import services of a country. When the exchange rate change reducing the
purchasing power of domestic currency (the value of domestic currency reduces), the price
level of goods and services in such country will be cheaper than those in international market.
The goods and services in such country will have better competitiveness leading to the
demand for goods and services increase, the demand for importing foreign goods and services
of this country will decrease making the balance of payment moves toward surplus.
The exchange rate also has profound impact on export-import turnover. This is the main
issue in international trade and has influence on the exchange rate policy of the government as
well as export-import decisions of enterprises.
The result will be reversed if the change in exchange rate raises the price of domestic
currency. The rise in the domestic currency takes effect of increasing relatively the price of
goods and services of a country in comparison with other countries leading to the decline in
the exportation and rise in importation. The balance of payment will move toward deficit.
1.2. Situation of Vietnams export-import activities affected by exchange rate
fluctuation (2007-2013)
VND/USD pair of exchange rate plays a very important part when accounting for 80% of
the total value of goods transactions in foreign trade activities. Therefore, focusing on the
behavior of this pair of exchange rate recently is relevant.

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In the period from 2007 to 2013, Vietnam in general and exchange rate policy in particular
were operated in a competitive free environment. The change of exchange rate policy much or
less impacts on export-import activities and balance of payment. However, the effects are not
equivalent to the role of exchange rate in an opening economy. Exchange rate policy in
Vietnam has not been operating as a tool supporting the activities of export-import but limited
to stabilize the financial situation.

Graph 1 : Exchange rate fluctuation in the period 2008-2013

Source: vneconomy.com
As mentioned above, exchange rate change has outstanding impact on the export
import turnover. The table below shows the fluctuation in the exchange rate and the change
in the export import turnover in Vietnam from 2007 to 2010.

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Table 1 : Export-import turnover and balance of payment in the period 2007-2010

From the table above, the value of export-import turnover is performed clearly through
this graph below to evaluate the impact of exchange fluctuation on export-import activity:

Graph 2 : Export-import turnover growth in the period 2006-2013

Source: General Department of Vietnam Customs


In 2007, the government continued to carry out exchange rate policy with the main aim at
encouraging the exportation, taking control of importation. However, that USDs price was
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reducing in comparison with other types of hard foreign currency and the huge flow of
capitals into Vietnam made the prevention of VNDs rise more complicated.
In comparison to the end of 2007, the pair of VND/USD in 2008 has risen by 9%,
exceeding the change by 1% in recent years while USD was still dominant in international
payment (appx. 70%). This outstanding rise pushed the export cost and manufacturing cost of
industry owning huge amount of imported input, materials, and the borrowing cost of foreign
currency. This year is a significant year when financial report of many companies exchange
rate increased remarkably.
The unpredictable changes in the exchange rate was also presented in the reverse at the
beginning of 2008 (declined in the beginning month, increased exceedingly in the ending
month), causing the disorder in the manufacturing and business plan of many enterprises.
During 6 months of 2008, the trade deficit reached 14.4 billion dollars, higher than the deficit
in 2007 ($14 billion). During the first half of 2008, inflation and rising trade deficit has led
many people and businesses transfer assets from VND to USD. The exchange rate on the free
market was at its peak of over the 19000 VND/USD, even 20000 VND / USD, while the
dollar price of the commercial banks was still around 16000VND and 17000VND.
In fact, many enterprises importing at the beginning of the month borrow a loan from the
bank to import raw material with the rate of 16.234 VND / USD; at the end of the month,
enterprises will buy dollars to repay loans with rate of only 16,015 VND / USD; thanks to the
reduction of exchange rate, the enterprise gains profit. Meanwhile, there have been exporters
having collected about 100000 USD if businesses collect exporting revenue in 8/2007, money
will be transferred to the rate VND 16,245 VND / USD, but if exports in 1/2008 then only
15,599 VND / USD, now enterprises will lose 26 million.
With the strong fluctuations of the exchange rate in 2008, it was a great influence on the
economy, import and export activities first of all.
Graph 3 : Export-import turnover of specific products in 2008

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Source: vneconomy.vn
Total exports of goods imported in 2008 reached 143.4 billion US dollars, up to 28.9 %
compared to 2007, while exports reached 62.69 billion US dollars, increased by 29.1 % over
the previous year, exceeding 7 % of the plan and imports reached 80.71 billion US dollars,
increased by 28.8 %. At the end of December 2008, Vietnam's trade deficit was $18.03 billion
reaching the peak, increased by 27.7 % compared with 14.12 billion in 2007.
In 2009, Import and export activities were still under the strong influence of the world
economic crisis; therefore, demand for imported goods of Vietnam and international countries
declined. The pair VND/USD did fluctuate complicatedly. This year is considered to record
the strong fluctuation of VND/USD in comparison with other pairs. That USD supply from
traditional sources such as export, FDI, tourism was in shortage while the demand for import
increased is seen to be the reason leading to exchange tension in Vietnam. Meanwhile, with
the loans policy of VND supported by the Government made the loan interest rate of VND got
nearly equal to USD loans which facilitated import companies to borrow VND to buy USD to
serve their payment without facing with exchange rate risk. This phenomenon also put
pressure on exchange rate and intensified the liquidity in the forex market.
Entering 2010, when exchange rate USD/VND increased, this led to not only increase in
the import but export as well, notably the increase in imports was stronger than the increase
in exports (0.83%) meaning that the trade balance was in deficit. This is because Vietnam has
high dependency on exports and imports. Because there is too much reliance on imports of
exports to the exchange rate, export growth is also increased and imports increased more than
the growth rate of exports, which explains why the trade balance remains deficit, although
exports have increased when VND declined in price.
In 2012, the situation of exchange rate in forex market was not optimistic as shown in the
graph below. Through 2012, average rate was kept sustainable at the rate 20.828 VND/USD.
However, at the beginning of the year, there was a sharp decline in the exchange rate which
was caused by sudden amendment by interbank. To be more specific, exchange rate in 2012
was divided into 2 periods: From Jan to Feb, there was a decline up to 20.820VND/USD.
From Feb till Dec, there was stable rate (from 20.825VND/USD to 21.036 VND/USD).
Graph 4 : The exchange rate growth rate in 2012

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Source: General Department of Vietnam Customs


The graph shows that there was significant fluctuation in the export-import activity and
the balance of payment.
Graph 5 : Export-import turnover in the period 2012-2013

With the impact of exchange rate fluctuation, we can conclude that there was a difference
between enterprises (FDI) and domestic enterprises. The trend was upward with the change in
export-import quantity. To export enterprises (FDI), the export turnover fluctuated slightly
and reached 68,3 billion USD, while the import turnover was quite the same with about 62
billion USD. This can be considered a pleasant signal for the enterprises granting from FDI.
For domestic enterprises, the quantity was quite high with the export turnover at the level of
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52,1 billion USD while the import turnover was a little bit higher than export which was at the
level of more than 65 billion USD.
During 8 months of 2013, the total value of products imported and exported were 99,55
billion USD, increased by 25,5%. Included in that export reached 51,55 billion USD,
increased by 26,7% and import reached 48 billion USD, increased by 24,3%.
To domestic enterprises, the total value of import-export products during 8 months of 2013
was 70,6 billion USD, increased by 2,4% and accounted for 41,5% in the export turnover;
export reached 33,6 billion USD, slightly increased 1% and import was 36,99 billion,
increased by 3,7%.
Export turnover in Sep 2013 was estimated to rise 11,3 billion USD, decreased by 5,2% in
comparison with the previous month and increased by 20% in comparison with the same
period of 2012. Export turnover of 9 months was estimated to rise 96,5 billion USD, increased
by 15,7%, in comparison with the same period of 2012.

1.3. Situation of risks export-import enterprises have to face with (Risk assessment)
Exchange rate (domestic currency/foreign currency) fluctuation is an important factor
affecting the production of enterprises, especially export-import business. Besides, the
abnormal fluctuations in exchange rates may cause incalculable risks for the import and
export business.
Risks that export-import enterprises may get stuck in:
1.3.1.

When the exchange rate increases:

*To exporter
When the exchange rate increase, the exporters may confront with economic risks

In this case, exporting enterprises also have many advantages because exchange rate rise
means that profits are provided by VND will increase. However, besides the advantages,
export enterprises have to cope with the increase in costs resulting from the purchase of raw
materials for businesses because domestic suppliers of raw materials would raise the price in
terms of exchange rate and the price increase may be higher than exchange rate growth. This
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makes the input cost of the product increases, causing the reduction in the competitiveness of
the export goods. However, if the price of some raw materials increases, this would not affect
much, but if the price of raw materials is simultaneously raised, then this will have a huge
influence on export enterprises.
*To importers:
For the importers, exchange rate fluctuation will cause much trouble to them because the
price of imported goods will increase relatively, so consumers will choose to use domestic
goods much more. However, Vietnam is the country wishing to import goods, so imports
during this period remains high.
And transaction risk is also
formulated.
Some companies importing
goods have difficulty with rising
rates. Such problems are: some
import company has their contract
signed before the rate increase and
at the time of payment and receipt
of goods, the rate increased to
make the business really worried
because they have to pay a lot
more money more and they have
to sell the goods at a higher price
without considering whether the
customers accept them or not.
1.3.2.

When the rate decreases:

*To exporter:
When rates fall, the exporters will have difficulty in exporting goods because of the
difference between the selling price and the cost of inputs. At the same time, the reduced rate
can cause damage to the business based on the following aspects: management activities,
materials, labor, .... more negative
results are now possible and
cause signal loss. This risk is
referred to as economic risk

*To importer:
When rates fall, import firms
cannot sell USD holdings to pay
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for imported goods because of heavy losses. This greatly affects the operation of the import
and export business. The unpredictable changes in exchange rate cause a significant disorder
to the import and export business. The financial risk is what most of enterprises meet at this
time.
Although beginning rates of 2008 decreased, but in comparison with 2007, the VND/USD
has increased by 9 % and the dollar still accounts for a high proportion of international
payments. The remarkable increase has made the cost of imports and production costs higher,
especially the pressure for large enterprise mainly importing inputs.
VND in this period rose while the US dollar exchange rate decreased, the Vietnam goods
were not competitive compared to other countries while the main export market of Vietnam is
the USAs. Meanwhile, the US goods were cheaper relative to goods of Vietnam, so the
volume of imports of goods increased. But in 7 consecutive months of 2008, the deficit was
under control at a low level. One of the main reasons is because the imported goods on the
world market fell sharply, especially gasoline
2. Assessment of exchange rate risks suffered from by export-import enterprises
State intervention in the exchange rate is clearly declining and seems to follow a
transmission mechanism with intent to proceed to the final step which is the elimination of
inter- bank rate. When the exchange rate regime is flexible, the exchange rate risk will occur
more frequently, the impact to business operations will be greater. To ensure business
performance, banks and participants of forex market must improve the prevention of
exchange rate fluctuations.
In the process of implementing export contracts, traders are faced with the volatile business
environment. The reasons include objective reasons and subjective at home and abroad. When
the cause of the risk is higher, the risk will occur with greater frequency and vice versa.
When that happens, the risk often causes serious consequences for the import and export
for two reasons. First, the value of import and export business is often greater than the
domestic business transactions. Second, the implementation of export contracts usually
involves more parties, so losses and damages are at their cost. In other words, the severity is
shown in the incidence of risk and greater losses
Risks are varied and complex: This feature stems from the fact that the causes of risks
arising in foreign trade business activities are inherently more diverse and complex than
ordinary business activities in the country. Therefore, the risk of contract performance relates
to import and export of various fields such as international transport, international payments
and insurance
Furthermore, the characteristics of foreign trade contracts are foreign elements, expressed
in the subject of the contract that the parties have different nationalities or base in different
countries, the goods - the object of the contract- often move across national boundaries or
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from jurisdiction to other jurisdictions. So the risk occurring in export contracts are usually
more complicated than domestic business contracts.

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Case study:
Binhminh Plastic JSC. importing 2500-3000 tons of material monthly lost 5 billion in May and
June 2008. In addition, according to leaders of Vietnam Textile and Garment Group, at that time, the
Group was damaged up to about 50 billion dollars due to the difference between the USD revenue
from export sales to commercial banks and USD buying price serving importation of raw materials.
In the first 10 months of 2009, the Vietnam Petroleum Transport Company (VIP) announced pretax profit was 101.8 billion, reaching 115 % of the plan. But in 12-2009, Resolution Board of
Directors announced an adjustment for expected profit from initial 88.5 billion to 55 billion.
According to VIP, reducing the profit plan was because the company must provision rate risk
increased over time. VIP loans were about $60 million, account of provision was 30 billion, pre-tax
profit was affectedMeanwhile, once the government had announced changes in exchange rate of US
dollar and Vietnam dong on 25-11-2009 shall be 5.44 % higher, PV Drilling (PVD) planned profit
would decrease by 5 % less than expectation due to provision for exchange rate risk. To Pha Lai
Thermal Power Company (PPC), business results after 11 months was positive, sales reached 4106
billion. However, at the end of 2009, Mr. Nguyen Khac Son, PPCs general manager, said: due to
the provision of exchange rate difference by about 527 billion, therefore, profit of last year was just
over 500 billion. As a domestic enterprise, export sale of the company DHG was not significant
(Only about US $ 1.5-2 million/year); while the price of imported raw materials was quite large
(about 30 million US dollars/year), the exchange rate change has had a major impact on production
costs of the company. These are examples of the impact of exchange rate risk for the export-import
activities of export-import enterprises.
In summary, sensitivity to exchange rate risk in Vietnam enterprises is engaged to import and
export activities highly increases in recent years. That is exactly what the business needs to be noted
and do research to find methods to limit losses, maintain operations and enhance competitiveness in
export-import enterprises

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B. Situation of exchange rate risks management in export-import companies


in Vietnam
USD plays an important role in export-import activities of Vietnamese companies when
almost all export-import companies use USD in international transactions. Other foreign
currency such as EUR and JPY are used, however, not much.
A research about Exchange Rate Management in export-import activities in competition
for Young Economist 2010 in Ho Chi Minh City has shown statistics about the situation
of exchange rate risks management in Vietnamese export-import companies. Among
surveyed companies, there are 58% concerned about exchange rate risks, 33% of companies
have heard however not really concerned about exchange rate risks yet and 9% have not ever
heard about exchange rate risks. The question here is that, why all of these companies take
part in export-import activities, there are still 9% of companies have not concerned about
exchange rate risks, which is an unavoidable in international trade and can cause a huge loss if
not concerned. The research shows that the number of export-import companies concerning
about exchange rate risks is not high, which means that some companies do not understand
the importance of exchange rate risks management in avoiding risks in business.
The research also pointed out that 91.2% of companies in the survey suppose that they
have to face up with exchange rate risks while 8.8% of companies suppose that they do not
encounter with exchange rate risks. The problem that the research pointed out is that the
number of companies facing up with exchange rate risks is quite high (more than 90%) while
there is more than 50% of companies concerned about exchange rate risks, which is not a high
number. In addition, what made 8.8% of export-import companies can avoid exchange rate
risks, is a interesting question that can be answered by the tools these companies use to avoid
risks.
Now, Vietnamese export-import companies use many measures to avoid exchange rate
risks. Some conventional methods that can be used are establishing reserve funds, applying
flexible pricing term, buying insurance, decreasing export and import. While these traditional
terms are widely accepted, companies started to show more interests about other derivative
financial instruments. However, there are many barriers that prevent export-import companies
from using derivative instruments; they are high costs, limited legal basis, incomplete
derivative instrument market, small-scale entrepreneur, tax and accounting detrimental to
business, small exchange rate fluctuation, etc. Especially, lacking of information is a crucial
reason causing limitations in using derivative financial instruments to prevent exchange rate
risks.
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1. Limitations of exchange rate risks management of export-import companies in
Vietnam
There are some drawbacks in exchange rate risks management in export-import companies
that require being concerned about.
1.1. Exchange rate risks management is simple, not professional and almost businesses

have not built up an efficient exchange rate risks management program.


Companies usually use a single method to manage exchange rate risks, not combine these
single methods to an incorporated one. For example, not many companies can combine
exchange rate risks management in export with exchange rate risks management in import.
This limitation leads to lack of synchronization as well as effectiveness in risk management.
When doing business internationally, many Vietnam companies do not focus on analyzing
partners business competence and financial situation to reducing risks and this is a drawback
of Vietnamese companies. In addition, when signing contract with partner, domestic
companies do not have enough powerful force to negotiate, or are not capable of applying
management tools of pricing terms into contract.
The risk management is implemented in a formal and unprofessional way. Most companies
still follow traditional way of business with short-term vision, lack ability of predicting
fluctuation of foreign currency in the future to have plan to cope with exchange rate risks,
which leads to the passive actions in risks management.
Moreover, the majority of companies have not established a professional and scientific
program for their long-term and efficient risk management, which led to the restriction in
dealing with exchange rate risks.
1.2. The scale of derivatives transactions in Vietnam market is not large
In world market, derivative contracts are in large scale. Derivative tools to insurance
exchange rate risks are forward, swap, future, option has been widely used for a long time
with daily turnover up to hundreds billion dollars. Derivative financial instruments are
exchanged through official market and OTC. Asia, Japan, Singapore and Hong Kong are the
nations that derivative market develops well. The subjects involving in the derivative market
in these countries are diverse, especially companies, investors, financial institutions, etc.
In Vietnam, the market participants are very limited. The derivative contracts accounted for
only 5% of the total foreign currency transactions, 95% is allocated as immediate translation
(2004 statistics).
In Vietnam market, foreign currency to buy / sell is mainly USD and VND. Many banks
determine foreign exchange derivative transaction is to meet customer's demand for foreign
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exchange to pay debts, loan, capital contribution or expenditure, through which banks get
benefits from interest and fees from services. About the form of Futures, options, etc,
although some banks have offered to businesses and households producing and trading
companies dealing with coffee, tea, food, after a short time, the number of companies using
this form reduces.
Furthermore, banks capability of providing export-import companies with derivative
transaction is still limited; sometimes banks are unable to provide these services to
companies. In 2008, in the beginning of recession, when at some points that USD become
scare, companies want to carry out transaction, however, banks cannot provide.
1.3. Export-import companies focus on traditional tools of exchange risk management,

not focus on derivative instruments to manage exchange rate risks


State Bank has permitted commercial bank system to operate derivative d system to
prevent and reduce exchange rate risks for a long time; however, export-import companies are
not interested in this kind of tool because they are familiar with traditional tools regardless of
its low effectiveness. For example, some companies set up reserve fund, however, reserve
funds main function is to prepare financial condition to overcome difficulties when risks
happen, not exclude or reduce risks.
The banking system becomes more and more developed in comparison to the past when
banks provide customers with many services to control risks. Some banks organize a careful
premiere to introduce these services to companies, especially for large corporations trading
cement, air industry, electricity, oil and gas, etc. These corporations usually face up with
exchange rate risks. However, contrary to banks expectation, there are a modest number of
customers.
When exchange risks insurance helps companies to reduce loss suffered by exchange rate
risk, many companies are not enthusiastic about buying insurance. The reason is that when the
exchange rate decrease, it will be profitable for import companies. If these companies buy
insurance, there is no profit gained.
2.

Causes of limitation in exchange rate risk management

There are internal and external causes, which lead to the difficulties or drawbacks in
managing exchange rate risks in export-import companies that required being clearly
identified to recommend suitable solutions

2.1. Internal causes


Vietnamese companies are in small and medium scale
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Small and medium scale prevents companies from getting access to derivative instruments
because of their high costs. Moreover, small and medium companies are not knowledgeable
about derivative instruments, which lead to limitation in using these instruments.
Lacking high quality human resource
Human resource is a crucial factor in managing exchange rate risks. High quality human
resource will help companies to control exchange rate risks professionally and effectively and
reduce loss for companies when risks happen and cause loss. However, in reality, Vietnamese
companies are lacking of high quality human resource, they are unable to find out right people
who meet their advanced requirements when education has not met the real demand of the
society.

Lacking long term vision and knowledge about modern exchange rate management

model that developed countries are using all over the world
Building up an incorporated and comprehensive risk-controlling program has many
benefits; it not only helps to control exchange rate risks but also minimize other risks due to
its mutual influence within a company. Many domestic companies do not understand the
importance of building this program or they just manage risks partly or single, not
incorporated.
In reality, many companies do not realize that pay an amount of money (premium) for
derivative instrument will bring back the peace of mind when doing business because it helps
to plan and control costs and risks in the future. Instead, they have their short-term goal is to
gain profit and not get loss. That is the reason why when the fluctuation happens does not
meet their expectation, companies stop to use derivative instrument without caring about their
effectiveness in the long term. The cause that leads to limitation of exchange rate risks
management mentioned here is that companies only care about the profit that derivative
instruments bring back, not care much about its function to prevent risks.
Business culture inside companies
One big cause that leads to the limitations mentioned above is unfair business environment
inside some companies. In some state companies, working is usually in a formal way, which
limits the creativeness of the staff, and cause people do work like an engine, not creative and
active to prevent and control risks.
Otherwise, the implicit protection policy of the State that keep the exchange rate of
USD/VND and the basic interest of VND stable over years makes companies not careful in
preventing risks.

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2.2.

External causes

Vietnam monetary market characteristics


In general, Vietnam monetary market is still young and inexperience (officially operated in
1992) in comparison to other monetary markets in the world, which have long history of
development.
The monetary market operates based on protection of the State and it does not have great
fluctuations, as well as less influenced by large worlds recession. This stability is an
advantage as well as a disadvantage because it will lead to the inexperience in solving
problems when risks of difficulties happen. There are two reasons why the State set up
exchange rate policy to keep it stable for a long time.
Firstly, Vietnam State bank focus on stabilize, or curb inflation, stabilize monetary market,
support domestic companies so that the exchange must be stable to facilitate export-import
companies. The exchange rate between USD and VND is very important. Exchange rate
management policy of State Bank follows floating mechanism. That is, there is always a
certain fluctuation between USD and VND and the State Bank controls it so that it just
fluctuates around this. Obviously, if exchange rate fluctuates too great, there is an intervention
from State Bank to keep it stable.
Secondly, difference between supply and demand of foreign currencies gradually
decreases, which makes the price of currency more stable. The economy grows and reduces
import, which reduced the volume of trade deficits and increased supply of dollars. In
addition, there is a policy to keep interest rates for VND much higher than interest rates for
USD so that people tend to choose VND as deposits rather than USD deposits, which tends to
reduce the level of dollarization in monetary market and to stabilize the exchange rate.
Derivative instrument market and other financial instruments are incomplete
The derivative products provided by commercial banks still have no futures contracts on
foreign currencies because State Bank has not permitted yet.
This can be explained by the fact that State Bank is afraid to put futures contract with
interest rate and exchange rate into transaction will facilitate speculators to falsify
information, influence stability of the market and the development of the economy.
Incomplete derivative instrument market is also reflected in the ambiguous regulations,
inadequate, and inconsistent to the market.
Unclear tax regulations
For example, the regulations of the income tax on interest earned from the implementation
of swap will constrain and be difficult to implement because of the floating interest rate varies
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every day. Furthermore, derivative instruments nature is to prevent risks to maximize profit
but not only for profit purposes.
High costs when using derivative instrument services
Currently, domestic act as a dealer to match with client and other large banks provide the
derivatives. Therefore, costs incurred are not small. If banks want to get profit as a dealer,
these costs include expenses of the bank partners, costs incurred in the implementation
process, the profit gap among banks. If banks directly provide services, there will be a series
of expenses such as the cost of searching for information, negotiating costs with partners, the
cost to adjust status to adapt the new conditions of the market and negotiable costs arising
from the uncertainties and risk information, institutional, unpredictable risks, etc. The high
cost is a barrier for businesses to use derivative instruments.
There are other reasons that lead to limitations in managing exchange rate risks.
They are banks limited advisory capacity, lack of transparency in information disclosure,
promotion and communication methods are limited and do not attract customers, the quality
of the products offered is not high, etc.
In conclusion, Vietnam export-import companies can aware the existence of exchange rate
risks in their business activities, however, the management of exchange rate risks is not very
effective due to some limitations caused by internal and external reasons. The main problems
are that companies have not established a complete, strategic and long-term risk-controlling
program. This must be carefully considered to recommend solutions to tackle with these
problems.

CHAPTER III: RECOMMENDATION: HOW TO MANAGE


EXCHANGE RATE RISK IN EXPORT-IMPORT COMPANIES IN
VIETNAM
A. Impacts of movements in foreign exchange rates on businesses
1. A fall in domestic exchange rate
It can increase costs for importers, thus potentially reducing their profitability. This
can lead to decreased dividends, which in turn can lead to a fall in the market value of the
business
It domestically produced products can become more competitive against imported
products
It can increase the cost of capital expenditure where such expenditure requires, for
example, importation of capital equipment
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The cost of servicing foreign currency debt increases
Exporters may become more competitive in terms of costs, potentially increasing their
market share and profitability
The business could become a more attractive investment proposition for foreign
investors for the business, the cost of investing overseas could increase
2. A rise domestic exchange rate
Exports can be less competitive, thus reducing the profitability of exporters. This can
lead to decreased dividends, which in turn can lead to a fall in the market value of the
business
It can decrease the value of investment in foreign subsidiaries and monetary assets
(when translating the value of such assets into the domestic currency)
Foreign currency income from investments, such as foreign currency dividends, when
translated into the domestic currency may decrease
The cost of foreign inputs may decrease, thus giving importers a competitive
advantage over domestic producers
The value of foreign currency liabilities will fall. Hence the cost of servicing these
liabilities decreases
The cost of capital expenditure will decrease if it is for the importation of capital
equipment, for example
The business potentially becomes a less attractive investment proposition for foreign
investors
The cost of investing overseas may decrease

B. Methods applied to export-import enterprises


Having identified and measured the potential exposure, the next problem is to manage it.
There are many methods for this, but before selecting one, the business should determine the
risk appetite of its key stakeholders such as directors. This will help to determine which
method would be the most appropriate. These are the main methods:

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Forward
exchange
contract
Foreign
currency
bank
accounts /
loan facilities

Foreign
exchange
Options
Hedges

Foreign
currency
options

Methods

Foreign
exchange
Forward
Hedges

1. Forward exchange contract:


This enables the business to protect itself from adverse movements in exchange rates by
locking in an agreed exchange rate until an agreed date. The transaction is deliverable on the
agreed date. The problem with this method is that the business is locked into the contract
price, even when the rate movement is advantageous to it. For example, if a business
purchasing capital equipment wanted certainty in terms of the local currency costs, it would
buy US dollars (and sell local currency) at the time the contract was signed, with a forward
rate agreement. This would lock in the local currency cost, ensuring that the cost paid for the
equipment will equal the original cost used to determine the internal rate of return of the
project.
2. Foreign currency options:
These enable an entity to purchase or sell foreign currency under an agreement that allows
for the right but not the obligation to undertake the transaction at an agreed future date. For
example, if an importer is importing goods denominated in US dollars for delivery in three
months and enters an agreement with their bank for a forward exchange contract, then the
importer is contractually bound to accept the USDs they have purchased at the agreed rate (for
local currency) on the agreed date. If the local currency strengthens against the US dollar then
the importer must still honour the contract even if the agreed rate is less favourable than the
current exchange rate. If the importer enters into a foreign currency option transaction, then
for the price of a premium, the option will protect the importer from downward movements in
the value of the local currency against the other currency, but allow the importer to benefit
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from increases in the local currency against the other currency. If, for example, the local
currency increases in value, the importer can abandon the option (and use the spot price of the
currency instead). If the domestic currency decreases in value, the importer can rely on the
rate in the option to purchase the goods. The maximum cost to the importer is the premium.
An exporter would enter into a foreign currency option that would protect it from upward
movements in local currency and get the benefit of downward movements in the local
currency by abandoning the option and using the spot price of the currency. Essentially, a
foreign currency option is like insuring against adverse movements in exchange rates. A
premium (which can be relatively expensive) to undertake this transaction is usually required.
There are a number of different types of options that can be used to manage foreign exchange
risk. This table shows the differences between the two types of foreign currency hedging
products. Forward exchange contracts Foreign currency options Obligation to buy or sell
Right to buy or sell Eliminates downside risk but no upside potential Eliminates downside
risk retains upside potential Physical settlement Only settle if favourable Rate given by bank
Own choice of rate Price of transaction in the rate an all-up rate Transparency of price paid.
The pricing of the premium has a number of variables, such as time value, volatility, which
currency, etc. A price comparison can only be done on a case-by-case basis
3. Foreign exchange Forward Hedges:
The most direct method of hedging exchange rate risk is a forward contract, which enables
the exporter to sell a set amount of foreign currency at a pre-agreed exchange rate with a
delivery date from three days to one year into the future. For example, U.S. goods are sold to
a German company for 1 million on 60-day terms and the forward rate for 60-day euro is
0.80 euro to the dollar. The U.S. exporter can eliminate foreign exchange exposure by
contracting to deliver 1 million to its bank in 60 days in exchange for payment of $1.25
million. Such a forward contract will ensure that the U.S. exporter can convert the 1 million
into $1.25 million, regardless of what may happen to the dollar-euro exchange rates over the
next 60 days. However, if the German buyer fails to pay on time, the U.S. exporter will still
be obligated to deliver 1 million in 60 days. Accordingly, when using forward contracts to
hedge foreign exchange risk, U.S. exporters are advised to pick forward delivery dates
conservatively or to ask the trader for a window forward which allows for delivery between
two dates versus a specific settlement date. If the foreign currency is collected sooner, the
exporter can hold on to it until the delivery date or can swap the old foreign exchange
contract for a new one with a new delivery date at a minimal cost. Note that there are no fees
or charges for forward contracts since the foreign exchange trader makes a spread by
buying at one price and selling to someone else at a higher price.
4. Foreign exchange Options Hedges:
If an SME has an exceptionally large transaction that has been quoted in foreign currency
and/or there exists a significant time period between quote and acceptance of the offer, an
foreign exchange option may be worth considering. Under an foreign exchange option, the
exporter or the option holder acquires the right, but not the obligation, to deliver an agreed
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amount of foreign currency to the foreign exchange trader in exchange for dollars at a
specified rate on or before the expiration date of the option. As opposed to a forward contract,
an foreign exchange option has an explicit fee, a premium, which is similar in nature to the
premium paid for insurance. If the value of the foreign currency goes down, the exporter is
protected from loss. On the other hand, if the value of the foreign currency goes up
significantly, the exporter simply lets it expire and sells the foreign currency on the spot
market for more dollars than originally expected; although the premium would be forfeited.
While foreign exchange options hedges provide a high degree of flexibility, they can be
significantly more costly than FX forward contracts.
5. Foreign currency bank accounts / loan facilities:
These alternative methods of managing foreign exchange risk can be used when the timing
of the foreign currency inflows and outflows dont match. The timing issues can be managed
by depositing surplus foreign currency in a foreign currency account for later use, or by
borrowing foreign currency to pay for foreign currency purchases, and then using the foreign
currency to repay the loan

C. Management of foreign exchange risk in four steps


1. Step 1. Identify and measure foreign exchange exposure
2. Step 2. Develop your Companys foreign exchange policy
3. Step 3. Hedge exposure using trades and/or other techniques
4. Step 4. Evaluate and adjust periodically

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Step one involves identifying and measuring the foreign exchange exposures that you
want to manage. As mentioned earlier, the focus for most companies is on transaction risk.
For an exporting company paid in U.S. dollars, measuring exposure involves subtracting the
U.S. dollars it expects to receive over a one year period, for example, against the money it
will need in order to make payments in U.S. dollars over the same period. The difference
determines the exposure to be hedged. If your company already has U.S. dollars in the bank,
subtract the account balance to determine the net exposure. Some companies only include
confirmed transactions while others include both confirmed and forecasted foreign currency
cash flows over the designated time period.
Once you have calculated your exposure, you need to develop your companys foreign
exchange policy as part of step two. This policy should be endorsed by the companys senior
management and usually provides detailed answers to questions such as:

When should foreign exchange exposure be hedged?


What tools and instruments can be used under what circumstances?
Who is responsible for managing foreign exchange exposure?
How will the performance of the companys hedging actions be measured?
What are the regular reporting requirements?

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The question of when to hedge is interesting. Transaction exposure can begin much earlier
than accounting exposure. As well, pre-transaction exposure cannot be ignored as selling
prices, once quoted, can rarely be changed in todays global marketplace. Therefore you must
carefully assess when to start hedging your exposure.
Step three involves putting in place hedges that are consistent with your companys
policy. For example, you may want to increase the value of raw materials imported from the
U.S. to partly offset the exposure created by sales to U.S. buyers. Alternatively, you may put
in place basic financial hedges with a bank or foreign exchange broker. The most commonly
used financial hedges are discussed further below.
Step four requires that you periodically measure whether the hedges are effectively
reducing your companys exposure. Establishing clear objectives and benchmarks will help
facilitate this evaluation. It will also alleviate the fear of those responsible for implementing
the policy that they have somehow failed if the exchange rate moves in the companys favor
and the hedges they put in place prevent the company from benefiting from that move.

D. Establishing management system in Export-Import Vietnamese business


1. Monetary Policy Management
1.1. Gradually increasing policy interest rates
The SBV flexibly adjusted policy interest rates in 2011, in line with the macroeconomic
and money market developments. From February to April, policy interest rates including
refinance rate, overnight lending rate in interbank electronic payment was gradually raised
from 9% to 12-13-14%/year; rediscount rate 7-12-13%/year. Subsequently, in October, the
SBV increased refinancing rate from 14%/year to 15%/year, overnight lending rate in interbank electronic payment from 14%/year to 16%/year. At the same time, the interest rate on
foreign exchange excess reserve was reduced from 0.1%/year to 0.05%/year, equivalent to the
rate applied to the SBV's deposits at FED using credit institutions' deposits, which aimed at
lowering interest costs for the SBV, in line with the direction of limiting foreign currencies
consistently held in accounts and facilitating a gradual shift from the foreign currency
borrowing-lending relationship to foreign currency buying-selling one.
1.2. Flexibly regulating open market operations (OMOs) in line with market supply and
demand of funds
OMOs in 2011 were regulated flexibly, closely following the market's fund supply and
demand developments, with the aim of supporting VND short term liquidity for CIs, helping
to stabilize market interest rates and exchange rate. Accordingly, the SBV conducted daily
transactions offering to buy commercial papers with short maturities (7 and 14 days); using
quantitative auction method; with interest rates adjusted in line with the objectives of SBV's
monetary policy management. During the first nine months of the 2011, with the objective of
strict monetary control to rein in credit and liquidity growth within the set targets, aiming at
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curbing inflation albeit ensuring liquidity stability for CIs, the SBV's OMOs offered to buy
commercial papers mainly with 7- day maturity, with interest rate raised from 10%/year to
15%/year, quantities offered to buy averaging at around VND 8.400 billion/session and the
average auction winning quantity at about VND8.000 billion/session. Since the latter half of
September, the annual credit and total liquidity growth rate were controlled within the targets
set at the beginning of the year, inflation showed signs of slower increases. In this context, in
order to ensure the money market stability and supporting exchange rate stability, the SBV's
OMOs offered to buy commercial papers with 7 day and 14- day maturities, with interest rate
of 14%/year, the average quantity offered to buy at VND 3,400 billion/session, and the
average auction winning quantity at about VND3,100/session.
Together with flexible management of other monetary policy instruments, OMOs
contributed to stabilizing the money market, ensuring the CI system's payment safety and
exchange rate stability; and keeping inter-bank market interest rates around OMO rates.
1.3. Flexibly using the refinancing instrument so as to support credit institutions'
liquidity
Refinancing is a monetary policy instrument used flexibly by the SBV in 2011 to provide
short-term financing support for CIs to ensure the system liquidity stability, at the same time
to provide additional funds for lending to effective production and business activities.
Refinancing loans for liquidity support had maturities from 1-3 months, and was concentrated
within roughly a month before the Lunar New Year so as to help CIs stabilize their liquidity,
ensure the system safety in the context of boosted payment demand of the economy.
1.4. Increasing the reserve requirement ratio on foreign currency deposits, keeping this
ratio on VND stable
The SBV kept the reserve requirement ratio unchanged for VND deposits to stabilize the
monetary market and limit interest rates increases, given that VND fund of the banking
system was not yet abundant, reserve requirement ratio was 3% for demand deposits and term
deposits with maturities under 12 months, 1% for term deposits with maturities of 12 months
and up. Regarding foreign currency deposits, the SBV implemented the following measures:
increasing the reserve requirement ratio 3 times from 4% to 8% for demand deposits and term
deposits with maturities less than 12 months, from 2% to 6% for term deposits with maturities
from 12 months and up; requiring CIs to calculate reserve requirement on their overseas
deposits pursuant to the SBV's Circular No 27/2011/TT-NHNN dated 31 August 2011.
1.5. Strictly controlling credit, shifting credit structure toward concentrating funds for
production sectors and limiting credit for risky areas
The SBV controlled the size and quality of credit and ensured the system safety through
strong and sychonous monetary policy measures, focusing mainly on: requesting CIs and
foreign banks' branches to control their credit growth, at the same time adjusting the credit
structure and improve credit quality to concentrate funds on production and business, reduce
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the speed and outstanding loans to non-production sectors by 30/6/2011 to 22%, and by
31/12/2011 to 16%; implementing regulatory measures to strictly rein in foreign currency
credit growth through increasing reserve requirement ratios and broadening types of deposits
that need to have required reserves in foreign currencies; increasing the risk weights of some
foreign assets from 20% to 50%, (v) narrowing the range of foreign currency resident
borrowers as well as lowering the caps of CIs' USD deposit rates for economic organizations
and individuals; and inspecting and examining some CIs with high foreign currency credit
growth.
2. Foreign Exchange Management
2.1. Average inter-bank exchange rate was increased, the trading band was narrowed,
foreign exchange market was intervened flexibly
In February, in order to stabilize the tensing FX market during the beginning months, SBV
increased average interbank exchange rate by 9.3% and narrowed trading band from +/-3% to
+/-1%. These adjustments were implemented together with other comprehensive measures
such as: interest rate caps of 3%/year for individuals' USD deposit and 1%/year for
institution's (except credit institutions), and lowering the caps in June correspondingly to 2%
and 0.5% to fight against dollarization in the economy and gradually shift borrowing lending
relationship to buying selling one; regulations to narrow the range of domestic resident
borrowers for foreign currency credits; increase of reserve requirement ratio for foreign
currency deposits in April; a set of solutions to ensure foreign currency for gas & oil import.
Thanks to these solutions together with tightening monetary policy, FX market was generally
stable from late February to mid-August. However, turbulence arose in the FX market and
exchange rate from mid-August. In order to stabilize the market sentiment and restore the
stability for gold and FX markets, the SBV implemented comprehensive solutions: flexibly
two-way adjusting the average inter-bank exchange rate based on supply-demand relation of
the foreign currency; guiding commercial banks to proactively sell foreign currencies to meet
the needs of the economy; announcement by the SBV's Governor to protect VND within 1%
depreciation limit until the year end to stabilize the public sentiment and finally, the SBV's
commitment was realized; coordinating with ministries to strengthen parallel market activities
and implement measures to stabilize the FX market. After the SBV's efforts, the FX market
witnessed positive changes and stable trend from October until the year end.

2.2. Managing the State foreign exchange reserves in order to ensure the safety,
liquidity and profitability
The State foreign exchange reserves management in 2011 continued to ensure principles of
safety, liquidity, and profitability, the reserves size increased. When the supply and demand in
the FX market were imbalanced, the reserves were used flexibly to stabilize the FX market,
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exchange rate and macroeconomic conditions. From the beginning of the year, the SBV
actively used various measures to flexibly manage the exchange rate and stabilize FX market.
Therefore, the market moved from excess demand condition in the Q1 to excess supply in Q2
and Q3. As a result, despite of the high payment demand in foreign currency in some periods
during Q1 and Q4, the reserves was improved for the whole year 2011 given the
accumulations in excess supply period.
2.3. Managing gold trading to stabilize domestic gold market
In 2011, SBV implemented measures to stabilize gold price and domestic gold market
through issuing a circular to terminate borrowing and lending in gold by credit institutions
and prohibiting banks to lend for gold buying purpose, except bullion licensed by the SBV.
Additionally, SBV increased risk ratio to 250% for gold-guaranteed loans. Especially, by
allowing five commercial banks and the SJC to intervene and stabilize the gold price, the
SBV narrowed the domestic and international gold price gap, which contributed to stabilizing
domestic gold price developments in line with international movements.
2.4. Managing current transactions and domestic use of foreign currency in accordance
with the integration trend
In the last year, thanks to open policies to attract capital inflow in Vietnam's integration
trend, and country-wide development of foreign currency payment- receipt network, the
remittance in 2011 rose by 12 % compared to 2010. This contributed to the improvement of
the overall balance of payments. At the same time, the SBV worked closely with the Ministry
of Public Security to regulate the market and supervise the implementation of regulations on:
(i) restricting the use of foreign currency in Vietnam's territory; (ii) stopping to post, advertise
goods and services price in foreign currency; (iii) regulating the operations of currency
exchange agencies in order to gradually fight against dollarization in the economy and
stabilize the FX market.
2.5. Managing capital transactions to ensure the soundness of the balance of
payments in accordance with the principles of foreign debt management
SBV collaborated with ministries to effectively manage capital inflows to ensure a sound
balance of payment. In 2011, the Ministry of Planning and Investment has granted 75 new
investment projects outward 26 countries, territories, and amended 33 existing projects.
Reports of corporations which had investment project abroad shows that USD 950 million. of
their outward FDI projects was disbursed in 2011. Additionally, SBV registered 1,156
medium-long term foreign loans by enterprises, totaling USD 5.5 billion disbursement rate
was under the annual limit. From 9/2011, the SBV set the required reserves rate of 1% for
foreign currency deposits abroad (Circular No. 27/2011/TT-NHNN dated 31/08/2011), which
helped harmonize capital flows and stabilize the FX market. The debt indicators were under
safety thresholds, in accordance with the IFI's standards. Accordingly, Vietnam's debt rate was
assessed to be within controllable range and not in the High Indebtedness Poor Countries
(HIPCs).
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Institutional system for monetary and banking activities continued to be improved in line
with the international practices and Vietnam's conditions in order to enhance the SBV's state
management effectiveness and facilitate CIs' operations in a safe and effective manner.
3. Legal activities.
3.1. Legal framework development
In 2011, the SBV issued 38 new Circulars, mostly on guiding the implementation of the
Law on the SBV and the Law on Credit Insititutions, important policies on monetary and
credit activities, foreign exchange management, prudential regulations, information
publication, administrative procedures reforms... These significantly helped conduct monetary
policy, facilitate Cis' safe and efficient operation. Besides, SBV amended, supplemented 07
Circulars to improve banking regulations system. In 2011, the SBV was assigned by the Prime
Minister to lead to draft Deposit Insurance Law and Anti-Money Laundering Law which were
in the Laws, Ordinances Developing Plan in 2011 of the 13th National Assembly. SBV
submitted the two above draft Law to the Government for scrutinization before submiting to
the National Assembly for approval. These two draft Laws were commented by 13th
National Assembly, Session 2, and proposedly to be approved in the next Session. In
addition to laws, SBV also submitted to the Government for issuing 02 Decrees: (i) Decree
10/2011/ND-CP dated 26/01/2011 to amend and supplement some articles of Decree
141/2006/ND-CP dated 22/11/2006 promulgating CIs' legal capital list; and (ii) Decree
95/2011/ND-CP dated 20/10/2011 to amend and supplement some articles of Decree
202/2004/ND-CP dated 10/12/2004 sanctioning administrative violations in monetary and
banking activities. The SBV also reviewed all legal documents which would expire in 2011
and announced in Decision 311/QDNHNN dated 24/4/2011 and Decision 1630/QD-NHNN
dated 21/7/2011. In order to establish and improve the banking sector's legal documents
database, in 2011 SBV coordinated with STAR project to systematize banking sector's legal
documents from 1951 onwards in an effort to sufficiently provide legal information and lookup utilities for legal development and implementation in banking sector.
3.2. Strengthening banking law enforcement
To strengthen law enforcement in banking, SBV implemented those key tasks in 2011:
Administrative procedures symplification, to implement Resolution 60/NQ-CP in 2010, SBV
simplified administrative procedures in 4 areas of payment, establishment and opperations of
banks, FX operations and monetary activities. Documents review and scrutinization: for the
institutional improvement of legal document review process, the Governor issued Circular
31/2011/TT-NHNN dated 30/9/2011 to replace Desicion 38/2006/QD-NHNN dated 1/8/2006
on reviewing and handling the SBV's legal documents. In 2011, SBV reviewed 36 Circulars
issued by the Governor and jointly by related authorities in the period from 01/10/2009 to
30/9/2010. The SBV reviewed under its authority other legal documents issued by Ministries,
ministry-level agencies, People's Commitees and People's Councils which related to SBV's
management areas. Also, SBV actively cooporated with Ministry of Justice to review some
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important legal documents on trending issues which were received public attention.
Strengthening to monitor the law enforcement: the SBV implemented solutions to monitor the
law enforcement situation in banking sector which based on Plan 1427/KH-NHNN dated
23/2/2011 on monitoring law enforcement. SBV reported to Ministry of Justice the
enforcement of regulations on payment. Reinforcing information dissemination and law
education activities: to conduct the Government's plan on these activities in the period of
2008-2012 as attached in Decision 37/2008/QD-TTg and and SBV's plan of information
dissemination and law education activities in 2011, the SBV made publication and
information dissemination of banking regulations and Government's Decrees on the SBV's
website
3.3. International legal activities
SBV participated in the legal discussion of international treaties, international
commitments, foreign contracts and agreements relating to monetary and banking activities;
cooperated in dealing with foreignrelated issues, disputes relating to monetary and banking
activities. Additionally, SBV also actively participated in reviewing international
commitments and agreements, examined and proposed the list of WTO commitments which
would be directly applied and cooperated with other international institutions such as WB,
CIDA, STAR, IMF in improving the legal framework. SBV introduced international standards
and practices into Vietnam's banking regulations, especially in developing the Law on Deposit
Insurance and the Law of Anti-money Laundering.

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CONCLUSION
In the present era of increasing globalization and heightened currency volatility, changes in
exchange rates have a substantial influence on companies operations and profitability.
Exchange rate volatility affects not just multinationals and large corporations, but small and
medium-sized enterprises as well, even those who only operate in their home country. While
understanding and managing exchange rate risk is a subject of obvious importance to business
owners, investors should be familiar with it as well because of the huge impact it can have on
their investments.Measuring and managing exchange rate risk are important functions in
reducing a firms vulnerabilities from major exchange rate movements. These vulnerabilities
mainly arise from a firms involvement in international operations and investments, where
exchange rate changes could affect profit margins, through their effect on sources for inputs,
markets for outputs and debt, and the value of assets. In this paper, we also tried to provide
brief overview and the issues associated with managing currency risk, in which alternative
methods have been presented. Prudent management of currency risk has been increasingly
mandated by corporate boards, especially after the currency-crisis episodes of the last decade
and the consequent heightened international attention on accounting and balance sheet risks.
Multinational firms utilize different hedging strategies depending on the specific type of
currency risk. These strategies have become increasingly complicated as they try to address
simultaneously transaction, translation and economic risks. As these risks could be
detrimental to the profitability and the market valuation of a firm, corporate treasurers, even
of smaller-size firms, have become increasingly proactive in controlling these risks. Thereby,
a greater demand for hedging protection against these risks has emerged and, in response, a
greater variety of instruments has been generated by the ingenuity of the financial engineering
industry. Despite our efforts in doing this research, there are inevitable mistakes as well as
deficiencies in the depth study, we hope this paper could be helpful to readers as to give a
basic overview of management of exchange rate risk in general and in Viet Nam in particular.

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