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UNIVERSITY OF ECONOMICS AND FINANCE FACULTY OF ECONOMICS THE IMPACT OF USD/VND EXCHANGE RATE ON THE IMPORT-EXPORT ACTIVITIES OF VIETNAMESE ENTERPRISES IN THE PERIOD OF 2010-2021 Lecturer: Tran Minh Tu Course: 221.FIN1117E.A02E No Full Name Student’s ID Contribution Nguyễn Văn Tấn Tài 205032386 100 % Nguyễn Tiến Thành 205084765 100 % Nguyễn Vân Thy 205084786 100 % Trần Thị Tố Nguyên 205084712 100 % Mai Phương Ánh Ngọc 205084092 100 % Ho Chi Minh City, October 2022 TABLE OF CONTENTS TABLE OF CONTENTS i LIST OF FIGURES ii I INTRODUCTION .1 II LITERATURE REVIEW 1 Some concepts related to the foreign exchange rate 1.1 Definition 1.2 Classification 1.3 Exchange rate regimes 2 The factors affecting to the foreign exchange rate 2.1 Balance of Payments 2.2 Inflation 2.3 Interest rate 2.4 National Debt 2.5 Political situation 2.6 Economic situation Balance of payments 3.1 Definition of balance of payments 3.2 Factors affecting the balance of payments .4 III ANALYSIS The relationship between foreign exchange rate and import-export activities 1.1 Export 1.2 Import List of events impacting to the USD/VND rate in the period 2010-2021 The impact of USD/VND rate to the Vietnam’s balance of payments 18 Risks of USD/VND rate volatility impacting to Vietnamese companies 24 4.1 When the USD/VND exchange rate decreases 24 4.2 When the USD/VND exchange rate increases .26 Measures to prevent exchange rate risk 27 5.1 Using a parallel import-export contract 28 5.2 Using the reserve fund for exchange rate risk 28 5.3 Using a forward contract 28 5.4 Using swaps 30 5.5 Using futures contract 30 IV CONCLUSION .30 V REFERENCES .31 i LIST OF FIGURES Figure 2.1: The movement of VND/USD exchange rate in 2010 Figure 2.2: The movement of VND/USD exchange rate in 2011 Figure 2.3: The movement of VND/USD exchange rate in 2012 Figure 2.4: The movement of VND/USD exchange rate in 2013 10 Figure 2.5: The movement of VND/USD exchange rate in 2014 10 Figure 2.6: The movement of VND/USD exchange rate in 2015 11 Figure 2.7: The movement of VND/USD exchange rate in 2016 12 Figure 2.8: The movement of VND/USD exchange rate in 2017 13 Figure 9: The movement of VND/USD exchange rate in 2018 14 Figure 10: The movement of VND/USD exchange rate in 2019 15 Figure 11: The movement of VND/USD exchange rate in 2020 16 Figure 12: The movement of VND/USD exchange rate in 2021 17 Figure 1: The relationship between exchange rate and balance of payments 18 Figure 2: The inflation rate in Vietnam in the period of 2010-2021 19 Figure 1: The fluctuation of USD/VND exchange rate in the period of 9/2019 - 1/2021 25 ii I INTRODUCTION In the conditions of an open economy, international trade becomes common, payments between countries necessarily use the currency of one country or another To perform the currency conversion of countries, countries must rely on exchange rates Exchange rate is one of the important macroeconomic policies of every country Exchange rates have always been a complex and sensitive issue for any economy Many economies are in a difficult situation caused by the exchange rate Therefore, it always attracts special attention of economists, scholars in Vietnam and in the world In an open economy, to integrate into the international market requires each country to choose an appropriate exchange rate mechanism The choice of an appropriate exchange rate mechanism will have a huge influence on the import and export activities and the trade balance of each country In order for a country to choose an appropriate exchange rate regime, it is necessary to understand the exchange rate, its role in the economy, and study the factors that affect the exchange rate exchange rate and the effect of the exchange rate on the import and export activities of a country Especially in the context of the current domestic and international economy, the study of exchange rates is a matter of high theoretical and practical significance Stemming from the above issues, our research team decided to choose the topic "The impact of USD/VND exchange rate on the import-export activities of Vietnamese enterprises in the period of 20102021" The research topic focuses on studying the exchange rate, the factors affecting the exchange rate, and the influence of the exchange rate on import and export From there, apply risk analysis of USD/VND exchange rate fluctuations in the period 2010-2021 II LITERATURE REVIEW Some concepts related to the foreign exchange rate 1.1 Definition An exchange rate is an index that measures the value of two currencies, an exchange rate that reflects the value of unit of one currency in exchange for another An exchange rate is the price at a time when the currency of one country or region can be converted to the currency of another country or region Accordingly, the exchange rate is calculated by the number of local currency units per foreign currency unit When the exchange rate falls, it means that the domestic currency appreciates and the foreign currency depreciates, conversely, when the exchange rate increases, the domestic currency decreases and the foreign currency appreciates The Central Bank uses exchange rate tools to regulate macroeconomic indicators such as: Trade balance, inflation, gold price stability, market interest rate stability in the basket of foreign currencies traded in Vietnam In the foreign exchange and foreign trade markets, USD is the foreign currency accounting for the largest proportion, selected by the State Bank as one of eight foreign currencies to calculate the central exchange rate in exchange rate policy management and administration The exchange rate mentioned in this article is the exchange rate between USD and VND, which is the average annual central foreign currency rate announced by the State Bank of Vietnam Foreign exchange rate risks exist on both sides of positive” and “positive”, in other words, risk is considered as the difference between the obtained results actual versus expectation Because the impact of exchange rate risk is seen received from both sides is positive and negative, so exchange rate risk is defined as follows: Exchange rate risk is the potential for earnings volatility unexpected net when exchange rate changes affect affects accounts receivable and accounts receivable payable in foreign currency 1.2 Classification Depending on different classifications, there are different types of exchange rates However, if classified based on exchange rate value, there will be two types of exchange rates: The Nominal Exchange Rate is the rate at which the currency of one currency is exchanged for the currency of another The nominal exchange rate represents the amount of foreign currency per unit of the local currency The Real Exchange Rates (RER) is the rate at which a person can exchange the goods and services of one country for the goods and services of another country The real exchange rate is expressed as the ratio of the prices of goods between two countries in terms of the same currency In other words, the real exchange rate reflects the exchange rate of goods between two countries 1.3 Exchange rate regimes The exchange rate regime of a country is a set of rules and regulations that determine and regulate the exchange rate of a country, in order to create an exchange rate mechanism to implement economic development policy in general and foreign economic relations in particular of that country Depending on the level of government intervention, the Government through the Central Bank (Central Bank) to implement certain exchange rate regimes can be completely fixed, according to the increasing level of government intervention can There are three typical exchange rate regimes: Fixed exchange rate regime: An exchange rate regime in which the central bank announces and commits to intervene to maintain a fixed exchange rate, called the center rate, within a narrow band predetermined The country's central bank is responsible for maintaining the exchange rate of the local currency by buying and selling the local currency in the foreign exchange market In order to intervene in the foreign exchange market, it requires the central bank to have a certain amount of foreign exchange reserves available, so when the country maintains a fixed exchange rate regime, it encounters many difficulties Floating exchange rate regime: A regime in which the exchange rate is determined completely according to the law of supply and demand in the foreign exchange market without any intervention of the central bank In the floating exchange rate mechanism, exchange rate fluctuations always reflect changes in the supply and demand relationship in the foreign exchange market The Government participates in the foreign exchange market as an ordinary member, which means that the Government can buy or sell a certain currency to serve the purposes of the Government's operations, not for the purpose of to intervene to affect the exchange rate or to fix the exchange rate Managed floating exchange rate regime: A regime in which the exchange rate is allowed to change in line with market conditions, but sometimes the Government intervenes to prevent it from moving out beyond certain limits The factors affecting to the foreign exchange rate 2.1 Balance of Payments A country's balance of payments is the difference between all money flowing into that country during a particular period and outflows to the rest of the world These financial transactions are carried out by individuals, companies and government agencies to compare the revenues and expenditures arising from the trade in goods and services When the balance of payments shows signs of overspending, it means the demand for foreign currency increases, the decrease of the domestic currency will cause the exchange rate to rise In contrast, when the balance of payments is favorable, the demand for the domestic currency increases and the foreign currency decreases This causes the exchange rate to fall 2.2 Inflation Changes in domestic inflation will affect international trade activities and directly affect foreign currency supply and demand, causing exchange rate changes If the domestic inflation rate is higher than that of foreign countries, the exchange rate will increase, that is, the value of the domestic currency will decrease On the contrary, the domestic inflation rate is lower than that of foreign countries, which means that the exchange rate decreases, the value of the domestic currency increases 2.3 Interest rate Interest rates have a significant impact on foreign investment activities This affects the exchange rate An increase in interest rates in a country will make that country's currency more attractive This increase will stimulate capital imports When the domestic interest rate increases, it will attract capital from abroad and increase the source of foreign currency This causes the exchange rate between the foreign currency and the local currency to decrease And vice versa, in the case of low domestic interest rates, the exchange rate between the foreign currency and the local currency increases 2.4 National Debt National debt is the cause of the national budget deficit When facing a budget deficit, countries will tend to mobilize funding from abroad through debt This causes the supply of foreign currency to increase and the exchange rate of the foreign currency relative to the domestic currency to decrease Besides, when the country mobilizes foreign currency to pay interest debt, to a certain stage, the debt has been paid off, the value of foreign currency decreases, the exchange rate also decreases accordingly 2.5 Political situation Most foreign investors tend to want to invest in countries with stable political situation Because of a stable political system, without wars and riots, they will be assured of production and business, and people will also consume more On the other hand, for countries that are politically stable, they will also have many priority policies for economic development, interested in investors, etc 2.6 Economic situation Besides politics, the economic situation also affects the decision to pour capital of foreign investors When a country's economy develops, people's income and consumption needs increase, foreign investors will pour capital in for the purpose of expanding the market, making the supply of foreign currency increase increase, thereby causing the exchange rate to change accordingly Balance of payments 3.1 Definition of balance of payments The position of the International Monetary Fund, presented in the “Balance of Payments and International Investment Position Manual”, 6th edition (BPM6) on the concept of the international balance of payments that members when establishing international balance of payments to be followed The balance of payments is a systematic statistical balance sheet that records all economic transactions between residents and non-residents during a given period (usually quarterly and annually) 3.2 Factors affecting the balance of payments The export value of goods is calculated by multiplying the export volume by the unit price Since unit prices can be denominated in local or foreign currencies, we will analyze the impact of exchange rates on export value in domestic and foreign currencies With other factors constant, when the exchange rate increases, the price of export goods in foreign currency decreases, stimulating an increase in export volume Thereby increasing the export value in domestic currency a Inflation With all other factors held constant (the exchange rate does not change), if the domestic inflation rate is higher than abroad, it reduces the competitiveness of this country's goods in the international market, causing the export volume to decrease decrease and imports increase Then the trade balance deteriorated b An increase in the world price of exported goods With all other factors constant, an increase in the world price of a country's exports will increase the demand for local currency 53 and increase the supply of foreign currency in the foreign exchange market by Foreigners will increase imports of the country's goods Increasing the value of exports in domestic and foreign currencies helps to improve the trade balance c Income of non-residents With all other factors unchanged, when the real income of non-residents increases, the demand for exports by non-residents increases Therefore, increasing the demand for domestic currency and increasing the supply of foreign currency, which increases the value of exports in domestic and foreign currencies, the trade balance is improved d Tariffs and quotas abroad With all other factors unchanged, the value of a country's exports will decrease if the foreign party applies high tariffs, low import quotas as well as other goods Non-tariff barriers such as quality requirements and bureaucracy lead to a decrease in the demand for local currency Then the trade balance deteriorated - The rate of increase in the price of exports relative to the price of imports: assuming other factors are constant, if the rate of increase in the price of exports is higher than the price of imports, the country needs to export less to buy in a certain quantity of imports Thus, helping to improve the balance of trade e National income Assuming other factors are constant, if the national income increases, the income of residents will increase, the demand for foreign goods will also increase, causing the import volume to increase and trade balance deteriorated f Taste Assuming other factors remain constant, if the taste of domestic people prefers to use foreign goods, the demand for imported goods will increase This leads to increased imports and a worsening trade balance Factors affecting the value of imports are similar to those affecting exports but have opposite effects g Terms of Trade (ToT) For terms of trade ToT indicates how many units of export are required to purchase one unit of imports The ToT is used as an indicator of the economic health of 54 countries, but it can lead analysts to draw wrong conclusions Changes in import and export prices affect the ToT and it is important to understand what causes prices to rise or fall ToT measurements are often recorded as an indicator for economic monitoring purposes Signs of improvement in a country's ToT often indicate that export prices have increased while import prices have remained or declined In contrast, export prices may have fallen but not as significantly as import prices A country can buy more imports for each unit of exports it sells when its ToT improves Therefore, an increase in ToT can be beneficial because the country needs to export less to buy in a certain quantity of imports The ToT indicates whether a country is in an advantageous or disadvantageous position in international exchange when it comes to price fluctuations If the ToT increases, it is greater than 1, the export value will increase and the trade balance will improve III ANALYSIS The relationship between foreign exchange rate and import-export activities 1.1 Export Export activities bring foreign currency for the country, increasing the supply of foreign currency abundantly, so reducing the exchange rate When the exchange rate is low, it means the high value of the domestic currency will make the price of Vietnamese goods abroad increase, more expensive than the other countries’ goods, reduce the competitiveness and limit consumption Thereby limiting the development of export activities On the other hand, when the exchange rate is high, that is, the value of the domestic currency is low, which will make the prices of Vietnamese goods abroad become cheaper and cheaper than those of other countries, increasing competitiveness and consumption, goods will be quickly purchased Therefore, it is the way to create conditions to expand and develop export activities This is the one of reasons why countries devalue their domestic currencies to boost exports However, the devaluation of the local currency entails many consequences and is bound by many other conditions, so government cannot easily devalue their owned currency 1.2 Import Import activities are spending foreign currency abroad to purchase goods and services back home, when increasing imports will increase the demand for foreign currency, thus having the effect of increasing the exchange rate The exchange rate is high, the prices of imported goods and services in the country are more expensive than domestic goods, reducing competitiveness, limiting consumption, thereby limiting the development of activities At the same time, it creates conditions to promote domestic production In contrast, when the foreign exchange rate is low, imported goods are sold at a cheaper price than domestic goods, increasing competitiveness, benefiting importers, but limiting the development of domestic production It’s the reason why, governments often use the policy of appreciation of the exchange rate: devaluation of local currency to limit imports in order to encourage the development of domestic product In conclusion, governments need to control the volume of foreign currency circulating in the economy, adjust the exchange rate reasonably so that the domestic currency does not depreciate as well as encourage domestic production of goods List of events impacting to the USD/VND rate in the period 2010-2021 2.1 In 2010 Figure 2.1: The movement of VND/USD exchange rate in 2010 The world's leading economy almost fell into a double recession, but fortunately escaped this risk However, the speed of economic recovery is still weak, not enough to reduce unemployment, which is at an extremely high level To support the economy, the US continued to maintain the policy of loosening credit, record low-interest rates and pumping more money into the market On November 2, the US announced the second quantitative easing package, with a value of 600 billion USD This US plan was strongly condemned by the international community, led by China and Germany, at the G20 summit in Seoul (VnEconomy, 2010) In terms of the structure of growth in 2010 by commodity groups, the highest increase was in the education group (up by nearly 20%); ranked second is the group of food and catering 2021) Figure 2: The inflation rate in Vietnam in the period of 2010-2021 This fact has had a significant impact on the psychology and life of people, and at the same time affects the production and business activities of enterprises The United States, Japan and European countries are major and important export markets for Vietnam At the beginning of 2008, when the financial crisis broke out, there was a trend to reduce the proportion of exports to the US-Vietnam's largest export market at that time Due to the economic recession, consumers of these countries have to cut their spending, which leads to a sharp decrease in demand for imported goods from Vietnam This is also said to be the reason for the deficit in the two years 2010-2011 Specifically, in 2010, total export turnover was only 72.7 billion USD, while imports reached 84.8 billion USD (Ngân hàng Nhà nước, 2011) By 2011, although Vietnam still had a tendency to trade deficit, the gap between exports and imports had narrowed, specifically, total export turnover reached 96.9 billion USD and import turnover reached 106.7 billion USD 3.2 In 2012 The clear and transparent decisions of the State Bank in the management of exchange rate policy in the first half of 2012, along with the positive movement of foreign currency supply and demand in the economy, helped the USD exchange rate to change VND in the first months of 2012 continued to maintain a stable trend: The average interbank exchange rate continued to be maintained at 20,828 VND/USD Export turnover reached 114.5 billion USD, an increase of 18.2% (17.6 billion USD) compared to 2011 Exports in 2012 prospered with the significant contribution of processed and assembled products: phones and accessories; electronic and computer components; textiles; footwear along with some key export products such as rice, crude oil, seafood Import 19 turnover reached 113.8 billion USD, up 6.6% compared to 2011 In the first half of 2012, Vietnam had a trade surplus again after many years thanks to the price advantage of some export products However, Vietnam's export structure has not yet undergone the necessary changes and is still dependent on imports to produce exports Vietnam's main export items are still mostly agricultural and aquatic products, low value-added goods and businesses still need to import a significant amount of raw materials to produce exports 3.3 In 2013 At some point in 2013, exchange rate pressure increased slightly according to developments in the domestic and international financial markets, some commercial banks raised the USD price to the allowable ceiling, even increasing the buying price equal to the selling price to the ceiling of 21,036 VND, the selling price in USD on the free market is up to 21,320 VND To put an end to the pressure on the exchange rate, on June 27, 2013, the State Bank of Vietnam adjusted the average interbank exchange rate by 1% to 21,036 VND/USD, after 1.5 years of being stable at the level VND 20,828, while continuing to affirm the determination to stabilize the exchange rate as the orientation set out at the beginning of the year After that time, the demand for USD at commercial banks began to cool down, causing spillover effects to the free market In the last days of 2013, USD price at commercial banks was stable around 21,140 VND On the free market, the USD price is popular at 21,180-21,200 VND For the whole year of 2013, export turnover of goods reached US$ 132.2 billion, an increase of 15.4% compared to 2012 Import turnover of goods in 2013 reached US$ 131.3 billion, an increase of 15.4% compared to 2012 with the previous year 3.4 In 2014 The year 2014 does not seem to witness excessive stress in the foreign exchange market, due to the impact of many positive factors at home and abroad, which has more or less stabilized investor sentiment Inflation and interest rates are also close to closing the gap If in 2012, inflation was still 5% higher than interest rates, by 2013, inflation and interest rates were balanced In the first months of 2014, the average interbank exchange rate between VND and USD was kept stable at 20,036 VND/USD until June 19, 2014 was adjusted by the State Bank to increase 1% to 21,246 VND/USD USD This adjustment shows the pressure to increase the VND/USD exchange rate, the demand for foreign currency increases, but it is still within the market's ability to respond as well as the regulation ability of the State Bank The adjustment of the interbank exchange rate this time is aimed at supporting exports in the last months of the year, thereby supporting economic growth in the context that the market's absorptive capacity is still weak while the export situation is not stable positive signs For many enterprises in export industries, especially those exporting to the US and Europe, this exchange rate adjustment will 20 open up new growth opportunities Facing the influence of the East Sea issue, the adjustment of the exchange rate to support exports at this time is also a positive impact, creating opportunities for businesses to expand their export partners and reduce their dependence on exports foreign partner According to the General Statistics Office, for the whole of 2014, the total export turnover of goods reached 150.1 billion USD, an increase of 13.6% compared to 2013 In general, the total turnover of goods in 2014 imports were estimated at $148 billion, up 12.1% compared to 2013 3.5 In 2015 After consecutive years of trade surplus, 2015 also marked the return of trade deficit The difference is not large, when Vietnam only had a trade deficit of about 3.2 billion USD during 2015, but it is a story about the sharp fluctuations of the main trends in the Vietnamese economy in 2015 That is the basic story of Vietnam's economy, which has a surplus of raw materials and machinery from China, production and trade surplus to Japanese and Western markets If the situation is favorable, Vietnam's trade surplus to Japan and the West increases more than the deficit from China, then in summary that year Vietnam is a surplus country According to statistics, in 2015, Vietnam exported a total of 162.1 billion USD, imported a total of 165.6 billion USD However, if we look at each market separately, it can be seen that Vietnam has an increasing trade deficit from more countries, while the number of countries with a trade surplus has decreased Specifically, Vietnam's trade deficit with China increased from 29 billion USD in 2014 to 32.3 billion USD in 2015, an increase of 12.5% compared to 2014 Vietnam also has more trade deficit from the market Korean market with a total of 18.7 billion USD, up 28% and ASEAN 5.5 billion USD, up 45% Meanwhile, a number of countries that had a trade surplus before Vietnam turned into a trade deficit, such as Japan Only the US and the EU are Vietnam, which still maintains a high trade surplus as in previous years, reaching 25.5 and 20.6 billion USD, respectively (Một Thế Giới, 2015) This phenomenon can be explained by the following two reasons Firstly, Vietnam is still dependent on raw materials and goods imported from China This level is not only not decreasing, but also increasing Secondly, more and more foreign companies (FDI) are investing in Vietnam, and they import more and more raw materials from abroad, while exporting less to those countries The trade balance deficit with neighboring China has made the foreign currency supply not as abundant as before, while the pressure to increase the reserve requirement of the State Bank is increasing due to the growth of imports As a result, the balance of supply and demand for foreign currencies was no longer balanced, which put more and more devaluation pressure on the dong This is believed to be the reason why the USD/VND exchange rate increased by more 21 than 5%, from 21,730 to 22,480 3.6 In 2016 The central exchange rate announced by the State Bank on December 30, 2016 stood at 22,159 VND/USD - an increase of 1.24% compared to the beginning of the year According to the General Statistics Office, in 2016, export turnover of goods reached 175.9 billion USD, an increase of 8.6% over the previous year - higher than the increase of 7.9% in 2015 In which, the domestic economic sector achieved export turnover of 50 billion USD, up 4.8%, while the foreign invested sector (FDI) reached 125.9 billion USD, up 10.2% Imported goods in 2016 only increased by 4.6% compared to 2015, reaching 173.3 billion USD The balance of trade in goods in 2016 reached a surplus of 2.68 billion USD - the highest trade surplus ever - partly offset the trade deficit in services of 5.4 billion USD and improved a lot compared to 2015, with a trade deficit of nearly 3.6 billion USD, while the balance of trade in services also had a deficit of 5.25 billion USD 3.7 In 2017 The phenomenon of VND/USD exchange rate with an upward trend in the first months of 2017, the main cause was determined to be the trade deficit in the first months of 2017 of 46 million USD It is easy to see that in the first months of 2017, import groups had a strong increase related to raw materials for production or machinery and equipment or electronics For the whole year of 2017, the total value of import and export goods of the whole country reached 425.12 billion USD, of which export reached 214.02 billion USD, import was 211.10 billion USD In which, the group of machinery, equipment, tools and spare parts reached nearly US$4.82 billion, up 30.8% over the same period in 2016; the group of computers, electronic products and components increased by 18.4% over the same period last year to more than USD 4.61 billion These are all high-value items, so partly due to the high world dollar price, the value of imports into Vietnam also increased sharply (Tổng Cục Thống kê, 2017) In 2017, up to 70% of Vietnam's export value was generated by foreign-invested enterprises Some items account for up to 100% of exports, such as mobile phones From their position as the main export sector, domestic enterprises now contribute less than 30% of the total export turnover of the country compared to 63% 10 years ago 3.8 In 2018 2018 can be said to be a tumultuous year with the macroeconomic situation accompanied by stress from the US-China trade war, in addition, policies from the Government also partly affected the exchange rate situation First of all, the US Federal Reserve (Fed) raised the reference interest rate by 0.25% four times in the past year, in order to stop the inflation vortex without dragging down economic growth 22 In addition, the US-China trade war situation, put pressure on the devaluation of the renminbi (CNY), leading to China being forced to devalue the yuan, putting pressure on the exchange rate VND price The trade war not only affects the economies of the US and China, but also affects exporting countries, including Vietnam According to updated data from Bloomberg, as of December 28, 2018, VND has depreciated by 2.26% compared to the beginning of the year, while China's CNY has depreciated by 5.34% Thus, the VND is appreciating against the CNY, which will lead to some disadvantages for the Vietnamese economy When selling the same product, Vietnamese goods will be more expensive than those of countries with deliberate currency devaluation, the competitiveness with these countries will be more intense because their prices are cheaper Finally, there is the intervention in the foreign exchange market by the State Bank (the State Bank) The central rate has been adjusted by the State Bank to increase continuously since the middle of November As of 28/12/2018, the central rate announced by the State Bank is 22,825 VND/USD, which has increased VND 104 compared to November 16 and an increase of VND 410 compared to the beginning of the year, equivalent to an increase of 1.82% 3.9 In 2019 The exchange rate movement of VND/USD is relatively stable In which, in the first month and the end of the year, the VND/USD exchange rate was stable around 23,250 VND/USD; As of 31/12/2019, the VND/USD exchange rate fluctuated strongly, hovering around 23,455 VND/USD; then gradually decrease in the last months of the year The drop in exchange rate at the end of the year led to a decrease in export turnover According to newly released data of the Ministry of Industry and Trade, in November, Vietnam's merchandise export turnover was estimated at 22.6 billion USD, down 6.7% compared to October 2019 but up 8% over the same period in 2018 In general, the export turnover of the whole year is estimated at 264.2 billion USD, up 8.5% over the same period in 2018 Regarding the import market of Vietnam's goods, in November 2019 estimated at USD 22.5 billion, up 0.6% compared to October 2019 and 4.5% over the same period last year For the whole year, import turnover was estimated at USD 253.07 billion, up 6.9% over the same period last year 3.10 The period of 2020-2021 Since the outbreak of the COVID-19 pandemic at the end of January 2020, the US Federal Reserve (Fed) has lowered its operating interest rate to 0-0.25%, in an effort to rescue the economy America from the recession caused by the pandemic The unprecedented easing policy along with the negative economic growth outlook of the US in 2020 has caused the USD to decline The USD/VND exchange rate at banks and on the free market both declined and moved sideways after the intervention of the State Bank from March 24, 2020 As of December 23 29, 2020, the buying and selling price of USD at banks is popular at 23,010-23,220 VND/USD and buying and selling prices on the free market are popular at 23,290-23,320 VND/USD (Vietstock, 2020) Despite being heavily impacted by the COVID-19 pandemic Especially, when the 4th outbreak hit the region, which was the driving force of commodity production in both the South and the North, Vietnam still maintained and recovered production quickly In particular, key export industries such as textiles and garments, leather and footwear, etc., despite the great impact of the epidemic, businesses still completed orders and achieved plans earlier than expected Import turnover in 2020 will reach US$262.4 billion, up 3.6% compared to 2019 Imports concentrate mainly on goods necessary for production and export, including machinery, equipment, and raw materials raw materials for production and export Merchandise export turnover in 2021 reached US$336.31 billion, up 19% over the previous year Import turnover of goods in 2021 reached USD 332.23 billion, up 26.5% over the previous year In 2021, there are 47 imported items worth over billion USD, accounting for 94.1% of total import turnover (Tổng Cục Thống Kê, 2022) An important factor contributing positively to the import and export performance in 2021 is the motivation from the Trade Agreements (FTAs) which are effectively applied by enterprises For example, the growth of exports to two markets where Vietnam has just had an FTA, Canada and Mexico, continuously maintained double digits Small markets like Peru also grow at times up to 300% EU and UK markets also saw double-digit growth (Báo Chính phủ, 2021) Risks of USD/VND rate volatility impacting to Vietnamese companies 4.1 When the USD/VND exchange rate decreases The supply of exported goods will tend to decrease because the revenue from export activities will decrease relatively, while most production activities, machinery, factory and labor costs are paid in local dong currency and exports become more expensive for foreign buyers Therefore, items from Vietnamese enterprises will also be restricted from exporting to foreign markets because of the picky buyers However, for some commodities where the input materials are mainly imported goods, the decrease in exchange rate will cause the price of imported raw materials in local currency to decrease As a result, the cost of producing exported goods will decrease If the cost of goods production decreases more than the decrease in export sales, the enterprise will still be profitable and develop export activities (Nguyễn Anh Nhân, 2011) When the price of the domestic currency increases, the price of imported goods converted into the local currency will decrease, so the demand for imported goods tends to increase A decrease in the exchange rate will increase the price of export goods denominated in foreign currency When other factors are held constant, an increase in the price of goods will reduce the 24 competitiveness of the product compared to similar products in the market This causes the demand for export goods to decrease (Nguyễn Anh Nhân, 2011) When the exchange rate falls, the demand for imports increases because the price of imported goods tends to decrease For example, company A buys fabric from China for 25 yuan/kg at the exchange rate of yuan (CNY) = 3,500 VND Enterprise A buys ton (1,000kg) of fabric for 25,000 yuan (about 87,500,000 VND) However, if the local currency appreciates, CNY = 3,000 VND, at this time, the business actually only has to pay 75,000,000 VND So the business has saved about 15 million compared to before Another example, the USD/VND exchange rate is currently 23,000, which means USD = 23,000 VND A company B exports goods and earns $10,000 If the exchange rate is changed by USD = 20,000 VND, then in theory, company B still earns 10,000 USD However, if converted into VND, it will only be 200,000,000 VND, a loss of 30,000,000 compared to before Figure 1: The fluctuation of USD/VND exchange rate in the period of 9/2019 - 1/2021 From the above statistics table, the exchange rate indexes all increased from September to October 2019 However, by the first month of November 2019, the exchange rate tended to decrease According to the survey, this period is the beginning of the COVID-19 outbreak in the world (Reuters, 2021) Although the exchange rate decreased, from January to March 2020, there was a phenomenon of increasing again because the epidemic has not affected much to Vietnam From April to September 2021, the whole world in general and Vietnam in particular are heavily affected by the epidemic Import and export activities have been delayed due to border 25 closure policies of countries around the world, and import and export activities of countries around the world have been delayed, affecting import and export turnover In addition, for countries that are not closed, but there will be restrictions and stricter customs clearance regimes, causing import and export costs to increase This has greatly affected import-export businesses around the world However, during this period, Vietnam still achieved a record of import and export turnover despite the lowest economic growth of 2.91% in the period 2011 2021 4.2 When the USD/VND exchange rate increases In the short term, an increase in the exchange rate between USD and VND (local currency VND depreciates) will increase the supply of exported goods However, in the long term, an increase in the exchange rate does not necessarily increase the supply of exported goods because the production costs of enterprises tend to increase, causing the demand for imports to decrease because the prices of imported goods tend to be more expensive (Nguyễn Anh Nhân, 2011) Evidenced on July 6, 2018, the US government officially "ignited" a trade war with China This move has caused trade tensions between the world's two largest economies, and Vietnam is also one of the countries affected by this trade war In the year of the US-China trade war, the USD/VND exchange rate increased by 3%, Vietnam is a country that imports more than it exports, in which imports account for 60% of important raw materials, related to technology, electronics, etc., the high exchange rate causes the cost and price of imported goods to increase According to the investigation agency, Vietnam Que Hoi Co - Vinasamex JSC, a company specializing in the production and export of cinnamon, with orders that have signed export contracts before the exchange rate changes, after the exchange rate increases, the USD will be higher the company gets more profit However, for contracts that have not been signed or signed later, the costs for overseas business delegations are very large and the short-term benefits cannot be compensated for the financial costs in the long-term However, if the selling price of exported goods in foreign currency remains the same, the income of exporting enterprises in local currency will increase In order to promote the consumption of goods, exporting enterprises can reduce the selling prices of exported goods in foreign currencies to stimulate demand for exported goods without reducing their profits in domestic currency A decrease in the selling price of goods can cause an increase in the demand for exported goods (Nguyễn Anh Nhân, 2011) In addition, when the exchange rate increases, the price of Vietnam's export goods (VND) such as textiles, seafood, agriculture goods will be cheaper than the price of US goods (USD) Therefore, Vietnam's exports are more competitive in foreign markets and can replace similar 26 products with higher prices For example, according to Mr Do Ha Nam, Vice Chairman of the Vietnam Coffee and Cocoa Association, coffee export markets that compete directly with Vietnam such as Indonesia and Brazil use a policy of strong devaluation of the local currency to the end of the year 30% to be able to compete with the coffee export market from Vietnam (Hương Dịu, 2022) And the US-China war in 2018 has contributed to expanding export opportunities of Vietnamese enterprises to the US market Based on the value of US imports, of the 818 product lines that China is subject to this punitive tax on, similar products exported to the US by Vietnam in 2017 were only worth $1.2 billion and the first months of 2018 were only 545 million USD Therefore, the opportunity for Vietnamese enterprises to take advantage of increased exports to the US when Chinese goods are subject to tax is negligible Moreover, because the taxed products are intermediate goods including machinery, mechanical equipment, means of transport, etc., not consumer goods, so if China cannot export to the US, it will be difficult to find the way to Asia, including Vietnam (Nguyễn Xuân Thành, 2018) In addition to the risk effects when the exchange rate increases as above, businesses also have a small impact on the transportation segment, increasing freight rates because the local currency is devalued, leading to an increase in the wages of transportation workers, export costs such as petrol, oil, intermediate yards increased Affecting the settlement and profit balance of enterprises Measures to prevent exchange rate risk As analyzed above, exchange rate risk, depending on its severity or not, can lead to a decrease in expected profit or upset business results of the company It is the responsibility of the board of directors, especially the chief financial officer, to analyze the impact of exchange rate risk and devise an appropriate way to hedge against exchange rate risk In the case of company A and company B as analyzed above, it is clear that when negotiating export or import contracts, the company faces exchange rate risk The problem with the company's board of directors and the chief financial officer is: (1) Is there a decision to hedge against exchange rate risk? (2) If yes, how to prevent? For the first decision, whether to hedge against exchange rate risk or not, is not an easy decision With A, a company with an export contract months later will be due to pay, if there is no hedging, months later if the USD depreciates, the company will suffer losses If he hedges against exchange rate risk by selling USD under forward contracts, months later if USD appreciates, the company will suffer losses months later the USD will appreciate or depreciate, no one can be sure To be able to answer the first question, Company A should: Firstly, what will the analysis of USD/VND exchange rate change in the next six months? 27 From there, what is the probability that the USD will appreciate, and what percentage is the probability that the USD will not appreciate compared to the VND Second, consider the level of financial impact and resilience of the company if not hedged against exchange rate risk Finally, consider management's attitude to risk Based on these three analyses, management will make the first decision whether to hedge or not In general, risk averse people when faced with such situations will make hedging decisions knowing that such decisions can be damaged if the USD appreciates They view losses (if any) as the necessary cost of insurance to buy peace of mind because the profits they expect are profits from exports, not profits from exchange rate fluctuations For the second decision, how to hedge risks, depending on conditions and performance, the company can choose one of the methods below 5.1 Using a parallel import-export contract This is a simple method of hedging exchange rate risk by conducting parallel import and export contracts of equal value and duration at the same time In this way, if the USD appreciates against the VND, the company will use the profit due to exchange rate fluctuations from the export contract to offset the loss due to the exchange rate fluctuation of the import contract Conversely, if the USD depreciates against VND, the company will use the profit due to exchange rate fluctuations from the import contract to compensate for the damage caused by the exchange rate fluctuation of the export contract As a result, whether the USD appreciates or depreciates, the exchange rate risk is always neutralized This method is simple, effective, easy to implement and less expensive if the company has diversified activities in both export and import However, the problem with this method is whether it is possible to have both contracts of equal duration and value at the same time 5.2 Using the reserve fund for exchange rate risk If the company cannot obtain both export and import contracts of equal duration and value at the same time, it can use a reserve fund to avoid exchange rate risk According to this method, when the company earns an extra profit due to favorable exchange rate fluctuations, the company will deduct this profit to set up a reserve fund to cover exchange rate risks When an adverse exchange rate causes the company to suffer a loss, the company uses this fund to compensate This method is also quite simple and does not cost much to implement The problem is the accounting procedures and the management of the reserve fund so that this fund is not misused for other purposes 5.3 Using a forward contract A forward contract is an instrument that can help a company avoid exchange rate risk because 28 the buying or selling rate in this contract is predetermined and fixed To illustrate the use of exchange rate hedging forwards, we consider two separate export and import contracts, respectively For export contracts that will be due for payment after a certain period of time, exchange rate risk arises if the foreign currency (USD) depreciates against the local currency (VND) In order to avoid risks, the company will contact the commercial bank to agree to sell foreign currency forward with a term equivalent to the term of the export contract In this way, the commercial bank will negotiate with the company a predetermined fixed-term purchase rate With a known fixed exchange rate, the company is certain of how much its export revenue will be in VND when it is due, regardless of fluctuations What is the spot exchange rate in the market at that time? Going back to the previous example, On August 7, 2013, company A is negotiating to sign an export contract worth 200,000 USD The contract will be due for payment on February 7, 2014, which is six months from the date of signing the contract At the time of contract negotiation, the spot buying rate USD/VND = 21,100 while the exchange rate at the time of payment (February 7, 2014) is unknown To hedge the exchange rate risk, the company contacted Eximbank to sell 200,000 USD for a 6month term After referring to the current spot buying rate and the 6-month deposit interest rate of USD and VND in the money market of Ho Chi Minh City at 2%/year and 6.5%/year, Eximbank offered The purchase price of USD for a 6-month term for Company A is 21,570 With this exchange rate, Sagonimex knows for sure that after six months, its export revenue will be 200,000 x 21,570 = VND 4,314,000,000 regardless of the spot exchange rate on the market at the time of payment For import contracts that will be due for payment after a certain period of time, exchange rate risk arises if foreign currency (USD) appreciates against the local currency (VND) In order to avoid risks, the company will contact commercial banks to agree to buy foreign currency forwards with a term equivalent to that of the import contract In this way, the commercial bank will negotiate with the company a known fixed forward selling rate With a known fixed exchange rate, the company is sure of what the import cost in VND will be when due, regardless of the fluctuations in the spot exchange rate in the market at that time Similarly, back to the example of company B on September 13, 2013, company B is negotiating to sign an import contract worth 200,000 USD The contract will be due for payment on March 13, 2014, which is six months from the date of signing the contract At the time of contract negotiation, the selling rate USD/VND = 21,150 while the exchange rate at the time of payment (March 13, 2014) is unknown To hedge the exchange rate risk, the company contacted Eximbank to buy 200,000 USD for a 6-month term After referring to the current spot rate and 6-month interest rate for USD is 2%/year and VND is 6.5%/year in the money market of Ho Chi Minh City, 29 Eximbank offers USD/VND exchange rate sell 6-month forward to company B is 21,620 At this rate, company B knows for sure that six months later, the import cost will be 200,000 x 21,620 = VND 4,324,000,000,000 regardless of the spot exchange rate in the market when payment is due 5.4 Using swaps Swap contract (Vietnamese style) is a type of contract that combines a spot contract and a forward contract between two agreed times and maturity Thus, if a forward contract can be used as an exchange rate hedge, a swap can also be used as a hedging instrument The method of application and implementation is similar to that in the case of the forward contract just described 5.5 Using futures contract Futures or futures contracts on the foreign exchange market can also be used as an exchange rate hedge For example, in the case of company A just analyzed above, the company can avoid risk by selling a futures contract that will mature in months Since the exchange rate in the futures market and the exchange rate in the spot market have a close correlation with each other, if after months the USD price falls against VND, company A will benefit from selling the futures contract while losses from export contract receivables and vice versa By compensating for losses from one contract, company A can hedge its exchange rate risk In contrast to company A, company B can hedge its exchange rate risk by buying futures contracts Since the exchange rate in the futures market and the exchange rate in the spot market are closely correlated, if after months the USD appreciates against VND, company B will benefit from buying a futures contract later while the damage from the import contract payable and vice versa By compensating for losses from one contract, company B can also hedge its exchange rate risk However, it should be noted that this method is only theoretical because there are currently no futures forex trading platforms in Vietnam This could hopefully become a reality in the near future IV CONCLUSION Exchange rate has been and will be an existing risk associated with the market economy that businesses must spend a lot of effort to consider and prevent For Vietnamese enterprises, the past and present reality shows that exchange rate fluctuations significantly affect business activities, especially import-export enterprises and foreign currency loans Before using hedging measures such as provisioning, using foreign exchange derivatives such as forwards, swaps, futures and options, businesses should be equipped with basic knowledge to identify causes and thereby fully identify exchange rate risks arising in their business activities 30 V REFERENCES Báo Chính phủ (2021, December 22) Vượt “bão COVID-19”, xuất đích ngoạn mục 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