INTRODUCTION
Rationale
Without a doubt, internationalization is becoming a stronger and stronger trend and it is a necessary process for development of particular country Integrating in the
Since joining the WTO in 2007, Vietnam has progressively enhanced its participation in international trade and global activities The foreign exchange (FX) market serves as a crucial link between the domestic economy and the global market, playing a vital role in regulating and balancing foreign currency flows while providing essential support for export and import businesses.
The Vietnam foreign exchange market (VinaFX) is evolving, providing a platform for commercial banks to engage in FX trading transactions However, these transactions come with significant risks, particularly exchange rate risk, which poses challenges for banks As the market matures, research into effective exchange rate risk management will be essential for enhancing the performance of commercial banks and navigating the complexities of this emerging market.
Research objective
This paper aims to understand the operations of VinaFX and the currency trading practices of commercial banks in the interbank market Additionally, it explores the methods of trading currency and derivatives within the FX trading department.
Understanding the market's working mechanism reveals challenges in FX transactions that necessitate robust exchange risk management By examining Agribank, I aim to uncover both real-world issues and specific problems within its exchange risk management system.
Via my study, definitely, I prefer to give out some solutions to overcome concerned issues at Agribank and recommendations for SBV in action.
Research methodology
According to Agribank's internal financial report, I will gather and analyze data from its financial statements to assess operational results Additionally, I will compare the fiscal years 2011 and 2010, considering the economic conditions and business outcomes during those periods.
I will analyze the regulations governing FX transactions within the risk management department and evaluate FX trading revenues in the trading department to assess the collaboration between these two areas Additionally, I will examine actual trading activities in the interbank market through Electronic Brokering Services.
(EBS) and Reuter Dealings to figure out some tactics to minimize exchange risk in FX market.
Technically, I cannot draw conclusions without computer aid of professional soft-ware that specializes in FX business And some are used for statistic and analysis purposes.
Scope of researches
This study examines foreign currency trading and exchange risk management techniques at Agribank's Operation Centre, specifically focusing on the risk management and FX trading departments Due to variations in organizational structures among credit institutions and limited industry data, a direct comparison of Agribank's outcomes with those of other commercial banks is not feasible.
Despite the limited time available to access intramural information, my findings and suggestions reflect only a surface-level understanding I hope that my efforts to grasp this research will be beneficial, providing readers with valuable insights into real trades in the FX market.
Structure of thesis
Taking internship at Agribank, I had a chance to penetrate all functions of
Agribank and especially trading activities in FX market My paper is the outcomes within 12 weeks at Agribank and it includes five main parts:
Chapter 2: Theoretical background of exchange risk management in FX market at commercial bank
Chapter 3: Current situation in foreign currency trading and exchange risk management at Agribank
THEORETICAL BACKGROUND OF EXCHANGE RISK IN
Overview of FX market
The foreign exchange market, or FX market, is a platform where convertible currencies are traded, with one currency viewed as domestic and the other as foreign based on geographical context This market is accessible to a wide range of participants, including multinational corporations and tourists, making it a vital component of global finance.
The foreign exchange (FX) market is a global, decentralized platform for currency exchange, involving banks, corporations, central banks, investment firms, hedge funds, and retail brokers worldwide, connected through internet and telecom systems Recognized as the largest and youngest financial market, the FX market's scale can be contrasted with major stock markets through comparative analysis.
As the chart reveals the currency market is 53 times bigger than stock markets.
The global foreign exchange market is a colossal $4 trillion, with retail traders focusing on the spot market, which accounts for approximately $1.49 trillion This market stands out for its 24-hour trading availability, excluding weekends, and its immense trading volume, making it the largest asset class in the world and ensuring high liquidity.
In fact, FX transactions are usually taken place between commercial banks
The FX market, which accounts for 85% of total transactions, serves as a platform for buying, selling, exchanging, and speculating on currencies among commercial banks, commonly referred to as the interbank market or OTC.
The chart illustrates that interbank market transactions account for a substantial 85% of foreign exchange (FX) activity, while commercial banks represent 99% This encompasses both inter-bank foreign exchange operations, known as the wholesale FX market, and retail FX services provided to bank clients International commercial banks utilize platforms like SWIFT to facilitate and settle their FX transactions efficiently.
Chart 2.2 Role of commercial banks in FX
Trading in the FX market offers numerous benefits, making it a popular choice among investors One significant advantage is the absence of commissions, clearing fees, exchange fees, government fees, and brokerage fees, as most retail brokers earn through the bid-ask spread Additionally, the FX market allows for flexible lot sizes, catering to various trading strategies and preferences.
In the futures markets, lot or contract sizes are determined by the exchanges In spot
In the foreign exchange (FX) market, traders have the flexibility to choose their own lot or position size, enabling participation with accounts as small as $25 Compared to the stock market, the FX market offers lower transaction costs, with retail transaction costs (the bid/ask spread) generally below 0.1% under normal conditions For larger dealers, the spread can drop to as low as 0.07%, depending on the trader's leverage.
Especially, FX market is opened 24-hour a day So, there is no waiting for the opening bell From the Monday morning opening in Australia to the afternoon close in
New York's FX market operates around the clock, making it ideal for part-time traders who can choose to trade at any time—morning, noon, night, or even while they sleep This continuous trading environment ensures that no single entity can dominate the market.
The foreign exchange market is vast and features numerous participants, making it impossible for any single entity, including central banks, to maintain control over market prices for an extended duration.
The FX market enables traders to utilize leverage, allowing them to control a larger contract value with a small deposit This leverage capability not only enhances profit potential but also minimizes the required risk capital For instance, a broker offering 50-to-1 leverage means that a margin deposit of $50 can empower a trader to execute trades worth significantly more.
The foreign exchange (FX) market is highly liquid, allowing traders to buy and sell currencies instantly under normal conditions, ensuring they are never "stuck" in a trade Traders can utilize limit orders to automatically close positions at desired profit levels or set stop loss orders to minimize losses Despite its vastness, entering the FX market is relatively affordable compared to trading stocks, options, or futures, thanks to the competitive offerings from online FX brokers.
"mini" and "micro" trading accounts, some with a minimum account deposit of $25.
Hence, FX trading much more accessible to the average individual who does not have a lot of start-up trading capital.
In the foreign exchange (FX) market, traders operate without the need for a centralized exchange, resulting in varying currency quotes from different dealers Unlike stock trading, where a single price is established, the FX market's decentralized nature allows for multiple price points for a given currency at any time Despite this lack of centralization, the FX market maintains a level of organization among its participants, as illustrated in the accompanying chart.
The interbank market sits at the pinnacle of the foreign exchange (FX) market, consisting of the world's largest banks alongside some smaller institutions Participants engage in direct trading with one another or utilize electronic platforms such as EBS and Reuters Dealing for their transactions.
3000-Spot Matching For the EBS platform, EUR/USD, USD/JPY, EUR/JPY,
EUR/CHF, and USD/CHF are more liquid Meanwhile, for the Reuters platform,
The GBP/USD, EUR/GBP, USD/CAD, AUD/USD, and NZD/USD currency pairs are among the most liquid in the foreign exchange market While all banks within the interbank market have access to the rates offered by one another, it does not guarantee that all participants can execute trades at those rates.
Hedge funds, corporations, retail market makers, and retail ECNs operate just below the interbank market, relying on commercial banks for transactions due to their lack of direct credit relationships, resulting in slightly higher costs At the bottom of the hierarchy are retail traders, who previously faced significant barriers to entering the FX market However, the rise of the internet, electronic trading, and retail brokers has significantly lowered these obstacles, enabling retail traders to compete with larger institutions more easily.
Currencies are traded through a broker or dealer, and are traded in pairs; for example the euro and the U.S dollar (EUR/USD) or the British pound and the
Exchange risk in foreign currency trading in commercial banks
2.2.1 Banking involved risks in FX market
2.2.1.1 Cash flow position and interest risk
Interest rate risk means the cash flow and financial performance uncertainty arising from interest rate fluctuations In order to penetrate this concept, we define:
Positive cash flow – PCF (inflow of cash): the incomes from other clients PCF is calculated in specific period.
Negative cash flow – NCF (outflow of cash): the expenses for others NCF is calculated in specific period.
1 LIBOR refers to London Interbank Offered Rate
Net cash flow position – NETCF: the difference between PCF and NCF at the same period, as a result, it reveals the balance at particular period of time.
Via those definitions, we can see that:
- Trading in the money market (borrowing/lending) will generate a positive cash flow or negative one of exact one type of currency at different points of time.
- Trading in FX market (going long/going short) will generate a positive cash flow or negative one of both currencies at the same time.
Table 2.3 Example of cash flow position at the end of trading day (t)
NETCF (t-1) PCF (t) NCF (t) NETCF (t) Economic Interpretation
- Potential income if interest rate increases
- Accrued loss if interest rate decreases
- Potential income if interest rate decreases
- Accrued loss if interest rate increases
Not depend on interest rate
2.2.1.2 Foreign exchange position and exchange risk
Foreign exchange risk means the cash flow and financial performance uncertainty arising from exchange rate fluctuations In this part, we also define some terminologies:
Long the Foreign Currency (LFC) refers to the strategy where commercial banks purchase a currency with the expectation that its value will increase over time If the currency appreciates, banks can sell it at a profit, earning more than their initial investment LFC is assessed over a defined timeframe to gauge potential returns.
Short Foreign Currency (SFC) occurs when commercial banks sell a currency, anticipating its depreciation Contrary to typical expectations, banks profit when the currency's value declines SFC is determined over a specific timeframe, reflecting strategic market predictions.
The Net Exchange Position (NEP) represents the difference between the Long-term Financial Commitment (LFC) and the Short-term Financial Commitment (SFC), encompassing both on-balance sheet and off-balance sheet items during the same period This metric provides insight into the financial balance at a specific point in time.
In FX concepts, the generation of an exchange position occurs at the moment contracts are signed, rather than at the settlement time This principle applies equally to both the spot market and the forward market.
Table 2.4 Example of exchange position of currency F and exchange risk
NEP F (t-1) LFC F (t) SFC F (t) NEP F (t) Economic Interpretation
- Profit or loss if exchange rate* increases or decreases
- Profit or loss if exchange rate decreases or increases
No profit, loss if exchange rate changes
*Quoted rate followed: foreign currency is base currency, domestic one is quote currency
Interest risk arises from differences in interest rates between two countries represented in a currency pair in a foreign exchange quote Additionally, exchange risk can lead to rapid price declines, potentially causing significant losses for traders unless stop-loss orders are implemented.
FX We will distinguish between cash flow position and exchange position, interest rate risk and exchange risk to penetrate the essence of exchange risk as the table 2.5 presents.
Table 2.5 Money market verses FX market
1 Borrowing and lending Long and short
2 Relating to only one currency Relating to two currencies
3 Transferring the right to use capitals Transferring the right to hold capitals
4 Pricing via interest rate Pricing via exchange rate
Generating the positive or negative cash flow position of one currency at different points of time
Generating the positive or negative cash flow position of two currencies at the same time
6 Do not result from exchange risk Resulting from exchange risk
Net cash flow position can be balanced via trading in both money market and FX market
Net exchange position can be balanced by trading only in FX market
8 Suffering from interest risk Suffering from foreign exchange risk
2.2.2 Foreign exchange risk in commercial banks
Foreign exchange risk occurs when banks hold assets or liabilities in foreign currencies, affecting their earnings and capital due to fluctuating exchange rates Predicting future exchange rates is inherently uncertain, as they can rise or fall unexpectedly, regardless of prior estimates This unpredictability poses a significant threat to a bank's financial stability, particularly if the rate changes occur in an unfavorable direction.
Foreign exchange risk can be either “Transactional” or it can be
Translational risk poses challenges for individuals and businesses engaged in international transactions due to the significant fluctuations in exchange rates over short periods This type of risk also encompasses accounting risks related to the conversion of assets held in foreign currencies or overseas In essence, the higher the percentage of assets, liabilities, and equity represented in a foreign currency, the greater the exposure to translation risk.
Commercial banks are constantly exposed to foreign exchange risk due to their involvement in foreign currencies, holding both assets and liabilities in these currencies This risk arises from various services offered by the banks, including both trade and non-trade activities Notably, foreign exchange trading activities play a significant role in this exposure.
1 The purchase and sale of foreign currencies to allow customers to partake in and complete international commercial trade transactions.
2 The purchase and sale of foreign currencies to allow customers (or the financial institution itself) to take real positions in FX market and financial investments.
3 The purchase and sale of foreign currencies for hedging purposes to offset customer (or the financial institution itself) exposure in any given currency.
4 The purchase and sale of foreign currencies for speculative purposes base on forecasting or expecting future movements in foreign exchange rates
Commercial banks engage in various trade activities, with three of them posing no risk exposure The first two activities are conducted on behalf of customers, transferring foreign exchange risk to them as the bank acts in an agency role The third activity involves hedging, where the bank mitigates risk by locking in exchange rates with other financial institutions using various financial instruments In contrast, the fourth activity carries inherent risks that may lead to gains or losses due to unforeseen outcomes Key foreign exchange contracts include ready, spot, forward, and swap, while banking products and services in foreign exchange can create non-traded foreign currency exposure.
A commercial bank faces foreign exchange risk primarily when it has not adequately hedged its positions This risk arises from uncertainties in future exchange rates that can impact the value of its financial instruments.
Exchange risk is a significant threat to the financial health of firms and credit institutions, as highlighted in the Military Bank report For commercial banks, fluctuations in exchange rates can severely impact currency trading activities Miscalculations in forward contracts for foreign currency exchanges can lead to liquidity shortages, leaving banks unable to conduct essential transactions and potentially leading to their collapse, similar to the 1997 Asian financial crisis.
Foreign exchange risk is mitigated by using different hedging techniques.
Hedging refers to techniques that offset particular sources of risk exposure Hedging can be done by using different ways as following.
2.2.4.1 Matching Foreign Currency Assets & Liabilities
A commercial bank strategically aligns its assets and liabilities in foreign currencies to maintain a profitable spread through foreign exchange (FX) transactions This approach guarantees a positive profit margin, irrespective of exchange rate fluctuations during the investment period For instance, if a bank has a one-year USD deposit liability at a 3% annual rate and a similar EUR liability at 2% annually, it can effectively match these liabilities by offering USD loans at 4.5% per annum and EUR loans at an appropriate rate.
4% p.a Using this method, the bank has locked into the profit of spread Thus, the
2 Five hazards: exchange risk, tax policy, competitive environment, capital capacity, and market volatility
In Latin, "p.a." stands for "per annum," meaning "per year" in English This indicates that the bank will receive payments in USD and EUR to repay the principal amount, ensuring that the exchange rate fluctuations do not impact the cost of currency exchange.
Commercial banks utilize foreign currency derivatives, such as futures, swaps, options, and forward contracts, to hedge against foreign exchange risk, with FX forward contracts being the most popular choice Rather than matching foreign exchange assets and liabilities directly, banks enter into forward contracts with the same maturity to mitigate FX risk without needing to issue loans in the same currency A key characteristic of these contracts is that they do not appear on the bank's balance sheet; instead, they are recorded off-balance sheet under Contingencies & Commitments.
2.2.4.3 Diversification of Foreign Asset-Liability Portfolio
Commercial banks manage foreign currency risk by maintaining multi-currency asset-liability positions, which not only mitigates risk but also reduces the overall cost of capital By diversifying their holdings across various foreign currencies, banks can effectively manage the risks associated with net open positions, primarily due to differing inflation and interest rates in various countries Consequently, the majority of commercial banks adopt multicurrency asset-liability portfolios to enhance their financial stability.
2.2.4.4 Golden trading rules in FX market
CURRENT SITUATION IN FOREIGN CURRENCY TRADING
Introduction to Agriculture bank
In 1988, the Agricultural Development Bank of Vietnam was established by
Decree No 53/HDBT dated 26 March, 1988 of the Council of Ministers (now the
The Vietnamese government has reformed the financial system and introduced commercial banks, with Agribank emerging as the largest bank in the country It leads in capital, assets, workforce, operating network, and customer base as of September.
2011, the leading role of Agribank has been confirmed by:
Total fund resources: VND 524,000 billion
Total outstanding loans: VND 354,464 billion
Operating network: 2,300 branches and transaction offices nationwide
Agribank is dedicated to innovating and applying banking technology to enhance business management and develop a sophisticated banking services network Notably, it is the first bank to successfully implement the "Intra Payment and Customer Accounting System" (IPCAS), a project funded by the World Bank.
IPCAS has enabled Agribank to provide local and foreign customers with modern banking products and services with extensive safety and accuracy At present,
Agribank is serving 10 million households and 30,000 enterprises and thousands of local and foreign partners Additionally, Agribank is one of the commercial banks in
Viet Nam who have the largest number of correspondent banks with 1,065 correspondent banks in 97 countries and territories (as of September 2011).
Agribank is currently taking the Chairmanship of Asia Pacific Rural and
Agricultural Credit Association (APRACA) in term of 2008-2010, and also a member of International Agricultural Credit Confederation (CICA) and Asian Bankers
Association (ABA) Agribank has hosted a number of big international conferences, i.e., FAO Conference in 1991, APRACA Meeting in 1996 and 2004, CICA
International conference on agricultural credit in 2001, APRACA Meeting on fishery in 2002.
Agribank stands out as Vietnam's premier bank for managing and executing foreign projects Amid economic fluctuations, it has successfully engaged with 136 initiatives funded by prominent institutions such as the World Bank (WB), Asian Development Bank (ADB), and French entities.
The Development Agency (AFD) and the European Investment Bank (EIB) have contributed to a total funding exceeding USD 5.1 billion Additionally, Agribank has consistently accessed and attracted new projects, including a recent financing agreement with European partners.
Investment Bank (EIB) phase II; Rural Finance Project III funded by WB, Biogas
Project funded by ADB; JBIC Project by Japan; Small rubber farming project funded by AFD.
As a leading commercial bank in Vietnam, Agribank has demonstrated significant efforts and achieved remarkable milestones, playing a crucial role in the country's industrialization, modernization, and overall economic development.
Agribank's core cultural values are: honesty, discipline, creativity, quality, and efficiency
Corporate culture serves as a vital internal strength for Agribank, enhancing its governance and solidifying its prestige both locally and internationally It shapes the qualifications, morale, and work style of Agribank staff, fostering a strong tradition that builds customer trust This foundation not only aids in expanding market shares and scales but also boosts Agribank's competitiveness in product and service quality on a global level.
In 2010, Agribank was recognized as the "No 1 Bank in Vietnam for cardholder development," boasting 6.38 million cards The bank accelerated its development of services and products tailored for the local market On June 28, 2010, Agribank opened its branch in Cambodia, and on November 20, it announced the establishment of Agribank Banking School, previously known as the Training Center Additionally, Agribank successfully conducted its 8th Congress Party during the same year.
2015), the 3 rd Excellent Individuals Meeting, the 6 th Sport Festival of the Bank.
Here I also listed key milestones in Agribank development progress:
1988 Established under the name of Agricultural
1990 Renamed into Vietnam Bank for Agriculture
1995 Made recommendations to set up the Bank for the poor
1996 Renamed into Vietnam Bank for Agriculture and Rural Development
2003 Awarded with Title of Labor Hero of the Reform era
2005 Opened the Representative Office in Cambodia
2007 The number one enterprise in Vietnam (ranked by United Nation Development
2008 President of the Asia-Pacific Rural and Agricultural Credit Association
Top 10 Vietnam Gold Star Award
In 2009, IPCAS II was officially launched, establishing online connectivity for all 2,300 branches and transaction offices The initiative was marked by a visit from Nong Duc Manh, the General Secretary of the Communist Party of Vietnam, who came to work and engage with the project.
The first bank won the prestigious “Top 10 Vietnam Gold Star” award for the 2nd time in a row
In 2010, the company was recognized among the Top Ten of the 500 largest enterprises in Vietnam and maintained its status as the financial institution with the highest charter capital in the country It also achieved remarkable growth, becoming the leading bank in Vietnam for cardholder development.
2011 Shifted the operation to the model of Sole member State-owned, LLC
Organization structure
First of foremost, I will present overall Agribank’s organization model of the management structure, and then I will demonstrate in-depth about Agribank Operations
Agribank is steadily expanding its network and enhancing its international brand presence As of the fiscal year 2011, the bank operates over 2,300 branches and transaction offices nationwide, including 158 type-1 and type-2 branches.
Agribank operates 775 type-3 branches and 1,400 transaction offices, alongside a joint-venture bank, Vinasiam, and an overseas branch in Cambodia With a workforce exceeding 42,000 employees, Agribank represents over 40% of the total banking personnel in the country, showcasing a highly skilled and locally connected team.
Apart from banking operations, Agribank also diversifies its investment in several sectors of finance It desires to run other businesses via various subsidiaries channels as listed here:
Agribank Gold Joint Stock Company (AJC)
Agribank Gold, Silver and Gemstone Sole Member, LLC, Ho Chi Minh City
Agribank Service Sole Member, LLC
Trading and Investment Sole Member, LLC, Hai Phong City
Agriculture bank Insurance Joint Stock Corporation (ABIC)
Agribank's operations are supported by three key administrative functions: the IT Center, responsible for software setup and technological assistance across the system; the Card Centre, which focuses on researching and developing card-related products for customers; and a third function dedicated to enhancing overall service efficiency.
Agribank Staff Training School is a place not only enhances the staff’s knowledge but also educates trainees to prepare future skillful human resources.
In Agribank Operations Center, it has many functional departments at the Head
Office that specialize in particular fields, in detail:
Risk Management Committee under Member’s Council
Individual and Household Credit Department
Department of Trusted Project Management
Department of Finance, Accounting and Treasury
Department of marketing and Public Relations
Products Research and Development Department
Economic Statistic and Forecasting Department
Risk Prevention and Management Centre
Operation results of Agribank in 2010 – 2011
Despite signs of recovery, the global economy faces significant challenges, including inflation and fluctuations in gold and oil prices In response to high inflation, the government implemented Decision 11, which highlighted key economic indicators from 2011 Notably, the Incremental Capital Output Ratio (ICOR) index remained elevated at over 6 during 2010-2011, indicating low production efficiency.
And, GDP (Gross Domestic Products) was 5.89% in 2011 that lower than GDP in
2010 (6.78%) Meanwhile, CPI (Consumer Price Index) keeps going seriously up to
18.58% in 2011 In general, confronting with global economy, domestic economy continued to solve difficult task of combining inflation restraint and growth assurance.
4 All macro indicators in my paper are referred to General Statistic Office website
Inevitably, financial institutions underlying commercial banks have been suffered from many obstacles and modifications in order to adjust with the harsh economic conditions.
In 2011, Vietnamese Banking sector operated with important legislative changes, especially when both the Law on the SBV (amended) and the Law on Credit
Institutions (amended) were officially approved by the National Assembly Facing continuous changes of interest rates, foreign exchange rates margin, and gold price, the
In 2011, the State Bank of Vietnam (SBV) issued Circulars No 22, 32, and 45 to improve safety standards and regulate capital usage and gold business operations among credit institutions Despite facing numerous challenges, banks experienced significant growth in size and actively expanded their networks while investing in product and service development This demonstrated their essential role in accelerating funds, stimulating economic development, and facilitating rapid integration into regional and global markets.
In the context of global economic difficulties due to the crisis and recession, as well as the domestic economy facing a number of challenges, the performance of
In 2011, Agribank solidified its status as a leading commercial bank and the largest financial institution in Vietnam, playing a crucial role in the rural financial market and the national economy The bank significantly contributed to the government's goals of controlling inflation, stabilizing the macro economy, and ensuring social security.
Agribank, one of the major state-owned credit institutions, has adhered to the State Bank of Vietnam's directives to enhance safety and systematically restructure the banking sector In 2011, Agribank increased its charter capital to 21,570 billion VND.
(only after BIDV 28, 251 billion VND), that increased 4.16% in comparison with 2010 and 83.54% in regarding to 2009
The total assets keep raising over consecutive years but at lower rate as the chart 3.2 shows It reveals the bigger and bigger size and strongly financial health of
Or in other word, in banking context, it reflects the cash flow which included cashes inflow and cashes outflow is constant and continuous for any customers’ needs.
Agribank has consistently achieved reasonable credit growth while prioritizing investments in agriculture, farmers, and rural development The bank particularly focuses on supporting farm households engaged in agriculture, forestry, fishery, and salt production Additionally, Agribank plays a vital role in facilitating exports and providing loans to small and medium-sized enterprises (SMEs).
To support the transformation of investment structures in agriculture and rural production, enterprises and cooperatives must ensure that at least 70% of their total loan portfolio is allocated to these sectors.
From 2008 to 2011, Agribank experienced significant growth in its revenues and profits, as illustrated in Chart 3.3 Specifically, revenues rose by 20% in the first year and continued to climb by 24.41% in the subsequent year, highlighting a consistent upward trend in the bank's financial performance during this period.
29.05%, and 43% in 2008, 2009, 2010, and 2011, respectively The operating result has been recovered from financial crisis 2008 and contractionary monetary policy of the
Agribank's net profit has declined from 3,319 billion VND in 2008 to 1,256 billion VND in 2011, largely due to a substantial increase in expenses, which nearly doubled from the previous year.
Last year, the bank increased its provisions for non-performing loans and bad debts, reflecting the challenging economic climate marked by high inflation and global turmoil, particularly in Vietnam This situation hindered the bank's ability to lend to individuals and businesses while ensuring internal liquidity Despite these challenges, Agribank maintained a strong position among commercial banks, ranking just behind Viettinbank and BIDV, thanks to its effective management policies.
As of 31 December 2011, Agribank total fund resources reached 504,425 billion VND, increased 29,454 billion
As of the end of 2011, the VND has shown significant stability compared to the beginning of the year, with a notable shift in the capital structure towards stabilizing funds from the population The funds mobilized from customers in the tier 1 market reached 448,938 billion VND, representing 89% of the total mobilized funds and marking an impressive growth of over 40% year-on-year.
Over half of Agribank's funding consists of short-term sources, typically under 12 months The bank focuses on enhancing fund growth from residential clients and economic organizations while diversifying its products and services This strategic approach to resource mobilization aims to create a suitable and sustainable capital structure.
As at 31 December 2011, the total outstanding loans reached
Agribank has solidified its leading role in financing agriculture, farmers, and rural development, with a notable increase of 17,254 billion VND (4.16%) since the start of the year Last year, the bank successfully transformed its investment structure, resulting in a significant 21.2% rise in loans dedicated to agriculture and rural areas.
(more than 42 trillion VND) in comparison with 2010 In short, the loans granted to agricultural and rural sector always accounted for 70% of total outstanding portfolio
In alignment with Decree No 41/2010/ND-CP, which promotes lending for the export and import sectors as well as government reserve procurement, Agribank implemented an interest subsidy lending program while limiting loans for real estate and securities The bank also maintained strict oversight of lending for investment projects In 2011, the total loans disbursed under the interest subsidy program reached 17,219 billion VND.
In 2011, Agribank processed 8,843,350 payment orders totaling 2,073,915 billion VND, averaging 35,093 transactions daily This included 4,081,035 interbank outward transactions worth 1,595,033 billion VND and 3,322,575 inward transactions valued at 1,391,780 billion VND, resulting in 29,379 transactions per day With its extensive online payment system connected to various banks and partners, Agribank has established itself as a trusted partner both locally and internationally, offering fast, efficient, and cost-effective services.
Taking the advantage of the wide network and technology, Agribank actively developed the payment services, for instance, State Budget Collection, Centralized
Interbank Electric payment, Payment connection, Collection, Capital Management,
By the end of 2011, Agribank emerged as the leading commercial bank in the State Budget Collection Service, operating 217 branches and 650 collection points.
Treasury for State Budget Collection.
The national import exceed export was about 9.89% in 2011, and the volatility in foreign exchange rate pressurized
Agribank in mobilizing foreign currencies for the expansion of its international payment services The total import export payment volume of Agribank was 7,891 million USD in 2011 (keeps dropping since
2008 at 10.2%), of which the payment volume of exports was 4,576 million USD and the payment volume of imports was
3,315 million USD Unit: Million USD
Current situation in exchange risk management at Agribank
3.4.1 Introduction to FX trading department
FX Trading department is in charge of several functions as followed:
Monitoring exchange rate fluctuation in both international and domestic market
Making prompt recommendations to Board of Manager of Agribank in conducting FX trading policies that are suitable with particular circumstance
Implementing exchange policies, managing exchange position, and trading foreign currencies inside Agribank
Setting up exchange rate trading system, and mentoring for Agribank branches the competitive exchange rate in comparison with other commercial banks
Representative for Agribank to trade FX in interbank market
Conducting spot transactions and derivatives activities followed regulations of the Government and SBV
Supervising and processing exchange position of the whole Agribank system
Reporting and conducting statistics of FX transactions under Agribank’s rules
Additionally, FX trading department also coordinates with risk management department to carry on some important tasks with the aim to put exchange risk under the control, in detail:
Chart 3.9 Organization structure of FX trading department
Summarizing and analyzing of FX trading quarterly and annually
Making researches about the flux of the money market in both domestic and international market
Drafting operation process of FX trading that combined with risk management before submitting for Board of Directors
Establishing and supervising position limit system
Summing up intramural statistics reports
3.4.2 Foreign exchange products of FX trading department
Based on business form, FX trading at Agribank could be classified into two core activities:
Proprietary trading, which constitutes 20% of total business operations, is conducted by dealers within the dealing room This activity involves trading currencies and derivatives in both international and domestic markets to generate profits based on fluctuations in exchange rates.
Brokerage constitutes 80% of total business operations, focusing on trading currencies and derivatives for profit In this role, banks act as agents, engaging in arbitrage activities without incurring risk The foreign currency resources that support bank branches are generated through reciprocal market trades, effectively mitigating exchange risks.
The foreign exchange (FX) market is known for its high-risk nature, where currency exchange rates can change rapidly due to various economic and political influences These fluctuations can result in significant profits in a short period.
In the fast-paced FX market, significant losses can occur rapidly, necessitating constant market monitoring by dealers to mitigate risks To address these challenges, Agribank has developed hedging products that comply with SBV regulations and its own policies The FX trading department offers four distinct types of FX products to assist customers in managing their trading risks effectively.
This transaction is based on Decision No 1452/2004 of SBV issued on Oct 11,
2004 It allows two parties (buying and selling one) to buy one currency against selling another currency at current exchange rate and settlement in the next two working days
Spot transactions facilitate the conversion of your existing currency into the required currency for payments When purchasing foreign currency, the ask rate provided by the bank applies, while the bid rate is used when selling currency For instance, the bid-ask rates at Operation illustrate this process.
Centre of Agribank updated on Apr 1, 2012.
Besides, Agribank also categorizes its spot transactions into two main types:
Retail sales under $20,000 will utilize the quote rate table from the operation center Consequently, at 7:30 AM each business day, the FX trading department will establish a consolidated quote rate table applicable across the entire Agribank system.
Table 3.2 Exchange rate of currency
Source: Operation Centre of Agribank
Wholesale transactions exceeding 20,000 USD will utilize the wholesale rate, which may vary based on specific circumstances Dealers are available to provide immediate spot exchange rates to front office tellers upon customer request These wholesale rates are sourced from international price tables and accessed through popular platforms like Reuters, Bloomberg, and Telerate For reference, a live price update from Reuters as of April 1, 2012, is presented in Table 3.3.
A forward contract is a customized agreement between two parties to exchange a specific currency at a predetermined future date and an exchange rate established today, known as the delivery rate This delivery rate corresponds to the forward rate at the time the contract is created, which is determined by the interest rate differential between the two currencies involved Importantly, the forward rate remains unaffected by future fluctuations in the actual exchange rate The FX trading department calculates this forward rate using two specific formulas, in accordance with Decision 648/2004 from the Governor of the State Bank of Vietnam (SBV).
Table 3.3 Live prices in Reuters
We can see an instance of forward rates between VND and USD at Operation
Centre of Agibank update on Mar 30, 2012 (table 3.4 next page)
The settlement of forward contracts will occur on a future date, defined as (T + n) + 2, where n is greater than or equal to 1 According to Section 7 of Decision No 1452/2004 by the State Bank of Vietnam (SBV), the maturity period for forward contracts involving the Vietnamese Dong (VND) and other currencies ranges from 3 to 365 days, while maturities for forward contracts between foreign currencies may differ.
Credit institutions and customers will determine the terms of contracts not involving VND While future contracts are a variant of forward contracts, Agribank does not regularly offer them due to the absence of a regulatory framework Instead, the bank acts as a broker, assisting customers in signing contracts in the future market.
Table 3.4 Outright Forward Rates between VND and USD
Term Bid - Ask Net Chg.
Source: Operation Centre of Agribank
A currency swap is a simultaneous purchase and sale of identical amounts of one currency for another with two different value dates (normally spot to forward) In
Vietnam, the SBV prescribes this activity is only executed by credit institutions, and legal entities, not individuals.
In Agribank, it has several types of currency swap products as followed:
1) The bank buys spot contract and sells forward contract
2) The bank sells spot contract and buys forward contract
3) The bank buys spot contract and sells spot contract
4) The bank sells spot contract and buys spot contract
5) The bank buys forward contract and sells forward contract
6) The bank sells forward contract and buys forward contract
A currency contract provides the holder the right, but not the obligation, to buy or sell currency at a predetermined exchange rate within a specified timeframe In exchange for this right, a premium is paid to dealers, which varies based on the number of contracts purchased Currency options are an effective tool for both corporations and individuals to protect against unfavorable fluctuations in exchange rates.
Based on Decision 1452/2004, the SBV allows only four credit institutions (Eximbank,
Citibank, BIDV, and Agribank) to implement currency options amongst foreign currencies, not for VND and foreign one.
Under Agribank's policies, European options are exclusively exercised at 2:30 PM on the maturity date, while American options allow customers to exercise their rights anytime after signing the contract and paying the total options fee, up until 2:30 PM on the maturity date.
In Agribank, the currency options fee will be calculated after FX trading department considered six factors, specifically:
The validity of currency options
Types of currency and the amount of traded currencies
European options or American options
The volatility exchange rate in the future
Considering references of options fee in international market
3.4.3 Performance of foreign currency trading activities in Agribank
5 An option that can only be exercised at the end of its life, at its maturity
6 An option that can be exercised anytime during its life
Foreign currency trading is one of the core revenues of Agribank every year.
The primary objectives of this operation are to attract foreign currency available in the market and facilitate overseas currency exchanges, while also addressing the business needs of our customers.
Table 3.5 Total foreign currency trading converted to USD
Table 3.5 highlights a significant contrast between the fiscal years 2010 and 2011, with a notable increase in both buying and selling foreign currency sales in 2011 Specifically, buying activities surged by 30% compared to the previous year.
873,921 thousand USD) in contrast to 2010 and occupied 54.6% of total trading On the other hand, selling activities rose at lower rate than buying ones (24.8% or equal to
Additionally, we also see the big jump in terms of percentage changes from
2010 to 2011 of both activities That could be explained by several reasons Firstly, in
2010, the exchange rate was occurred unpredictably, and VND was depreciated 3.3% in this year Moreover, due to the unfavorable macroeconomics, the exchange rate
USD/VND was quite strain Significantly, the balance trade was negative seriously
The imbalance of imports exceeding exports has led to a decline in national foreign exchange reserves and a continuous devaluation of the Vietnamese Dong (VND) Additionally, the existence of two exchange rate mechanisms—the official rate and the free market rate—has fueled speculation and increased dollarization in the market.
In 2011, the Government and SBV attempted to implement the Resolution 11, and carried out a lot of administrative policies to put exchange rate under the control.
SOLUTIONS AND RECOMMENDATIONS
Development trend of currency trading at Agribank in the future
As we progress into the 21st century, the increasing globalization driven by free market dynamics and international financial investment is evident worldwide, including in Vietnam This trend necessitates that countries engage in trade, loans, and capital investments with one another, thereby establishing robust monetary relations and a framework for international finance.
Financial relations and international currency are essential components of economic activity, significantly influencing the free market and shaping foreign currency transactions Commercial banks, as vital pillars of the economy, play a crucial role in accelerating the industrialization and modernization processes within the country.
Agribank, a prominent bank in Vietnam, is focused on improving its operations and financial products to align with market demands This trend has made foreign exchange operations increasingly vital to Agribank's business model Notably, Agribank uniquely specializes in agricultural development in Vietnam, supporting the export of essential commodities like rice, coffee beans, and pepper.
Therefore, the need of foreign currencies to serve for this sector is so significant.
Foreign currency trading is a lucrative venture for banks, enhancing service quality and diversifying banking operations Over the years, trading structures and exchanges have evolved significantly, largely driven by technological advancements that facilitate increased foreign transactions in the FX market Moving forward, Agribank will remain focused on expanding its FX trading activities while effectively managing exchange risks.
Solutions to enhance exchange risk management in Agribank
The Risk Management Department at Agribank is responsible for overseeing various types of risks, including liquidity, interest, exchange, and systematic risks As discussed in Chapter 3, a key function of this department is to establish position limits for the foreign exchange (FX) trading department However, the current limit system is still in its basic phase and requires further refinement, particularly regarding specific FX operations In this paper, I propose solutions to enhance the monitoring of two core operations.
Spot transactions are a popular trading activity, but they are influenced by short-term factors like rumors, central bank interventions, and unforeseen events These factors can arise suddenly, often within minutes, requiring dealers to respond quickly to market changes As a result, traders frequently adjust their positions to maximize profits or minimize losses.
Dealers are exposed to exchange risk whenever they hold open positions To manage this risk effectively, they must assess their positions at the end of each trading day By analyzing the closing exchange rates, dealers can calculate their daily business results These results are then reported to the Head of Risk Management and the FX Trading Department.
A dealer conducted spot transactions within a single day, initially appearing to generate 500,000 USD by selling 382,965 EUR However, a closer evaluation of the total transactions reveals a loss of 439.11 EUR due to minor fluctuations in the USD-EUR exchange rate This loss falls within the permissible limits set for the dealer, highlighting the critical importance of daily evaluations in foreign exchange trading.
Table 4.1 Business result of spot transactions
Transactions USD EUR EUR/USD
Position at the end of trading day + 500,000 - 382,965.31
Pricing at the end of trading day - 500,000 + 382,526.20 1.3071*
In the interbank market, forward transactions typically involve spot-forward swaps, where each transaction consists of two components: spot activity utilizing the spot rate and forward activity using the forward rate, each with distinct valuation dates Consequently, the net forward position is influenced by the difference between the spot and forward rates, which are primarily determined by the interest rate differential between the two currencies Generally, when interest rates remain stable, the forward rate experiences minimal fluctuations.
Because interest rate is not change as much as spot exchange rate, a dealer will suffer a big loss if he forecasts wrong about interest rate movement
Dealers cannot frequently alter their forward positions like they can with spot positions, resulting in forward contracts lasting for a specific duration Evaluating forward transactions requires the assumption that all valid contracts are settled at the closing rate at the end of the trading day, corresponding to their specific terms For instance, as shown in Table 4.2, the evaluation of forward transactions on February 1 indicated a profit of 1,000 CAD, while on February 2, the evaluation reflected a loss of 1,000 CAD due to market volatility.
Evaluating risks within a single day is crucial for effective risk management Additionally, risk managers must establish limits for specific forward terms, with these limits typically being lower for longer durations and higher for shorter terms.
In the interbank market, dealers engage in direct trading, showcasing their expertise and skills At the start of each day, they must assess overnight exchange rate fluctuations, review relevant news impacting the FX market, and discuss market volatility and key currencies The dealing room is tasked with continuously monitoring exchange positions and having an exit strategy in place Furthermore, each dealer is accountable for their gains and losses, ensuring their trading activities remain within set position limits and under control.
The back office has function to confirm transaction, make payment to customers, compare the total balance, and record account at dealing room
The intermediary section is responsible for overseeing position limits assigned to each dealer, ensuring that they do not engage in speculative trading that could expose them to excessive risk Additionally, it collaborates with internal audit and supervisory teams to monitor foreign exchange (FX) trading transactions effectively.
4.2.3 Using modern technology and opening training courses
In foreign exchange (FX) trading, information technology is crucial for effective decision-making A robust computer system with high-speed connectivity and real-time updates significantly boosts the ability to predict exchange rate fluctuations and ensures timely delivery of live rates to branches and tellers By implementing advanced technological solutions, Agribank can enhance its FX business operations.
Using EBS system The system allows traders to make orders matching automatically, and provides real time rate for dealers at any time even overnight.
Agribank dealers can place orders in the Electronic Banking System (EBS), which will be executed if other banks in the market provide matching quoted rates.
Some professional soft-wares to support for risk management, analysis and forecast will be useful As foreign commercial banks use modern soft-wares of
Kondor, Bloomberg, risk evaluation system VaR (value at risk), and FX trading such as MT4 (meta trader)
Recently, Agribank has been concentrated to build up information system to serve customers efficiently and proficiently following SOA (Service Oriented
Agribank's information center is set to evolve with a strong customer-centric approach, focusing on both internal and external clients This development will be guided by three key criteria: enhancing the core banking system, improving supporting systems, and advancing business oversight.
When acquiring modern software, Agribank must prioritize comprehensive training, including inviting IT specialists to provide guidance on software usage and management This training enables staff to effectively utilize the software while integrating their knowledge of the FX market for informed decision-making The computer system serves merely as a tool to enhance the efficiency of FX transactions Additionally, targeted FX operation training courses are essential for penetrating the FX market and staying updated on new FX products utilized by partner commercial banks globally.
Diversification involves spreading risk capital across unrelated currency pairs or trading systems to enhance trading performance consistency For instance, a trader utilizing one system on two unrelated currency pairs can mitigate the impact of prolonged losing streaks When one pair signals a loss, the other may yield a winning trade, offsetting the loss By allocating risk capital across two pairs, the trader ensures that simultaneous losses do not exceed the position limit, leading to more stable capital growth compared to trading a single pair.
In Agribank, mostly traders pay attention to few pairs like EUR/USD,
While USD and EUR are the two most popular currencies in commercial banks, traders can also consider other currency pairs related to these major currencies, such as GBP/USD.
Recommendation to SBV
In 2011, the global financial markets experienced significant fluctuations that greatly affected the foreign exchange (FX) market In response to these challenges, the State Bank of Vietnam (SBV) implemented various solutions and policies aimed at managing the exchange rate and FX reserves to stabilize the market effectively.
2011, Vinaforex market had been in strained situation due to high inflation, high trade deficit, the dollarization was significant, and carry trade has developed
Last year, SBV adjusted interbank exchange rate up to 9.3% Governor Mr.
In Q4 of 2011, Binh confidently assured the public that any depreciation of the VND would be restricted to just 1% His assurance proved accurate, as after some fluctuations, the USD/VND exchange rate stabilized.
The exchange rate remains stable at VND20,820 in both interbank and unofficial markets, allowing the State Bank of Vietnam (SBV) to effectively replenish its foreign exchange reserves, which now stand at approximately 16 billion USD, equivalent to 1.9 months of imports.
The State Bank of Vietnam (SBV) has implemented various measures to transition from mobilizing foreign currency loans to facilitating currency exchange, aiming to reduce dollarization and stabilize the value of the Dong Recently, Circular No 07/2012, effective May 2012, was issued to regulate the foreign credit and exchange positions of credit institutions, mandating commercial banks to decrease their open exchange positions and restrict foreign lending to customers.
SBV wants to minimize exchange risk and foreign speculation, and to centralize its control power.
Since the end of 2011, a stable exchange rate has significantly facilitated foreign exchange trading at commercial banks and mitigated exchange rate risks in the interbank market However, existing policies are primarily short-term measures and require time to demonstrate their full impact To improve exchange risk management, it is essential to implement more effective long-term strategies.
Vinaforex development, I would like to recommend some ways out to SBV.
Building exchange rate followed supply and demand needs
As the Central Bank, the State Bank of Vietnam (SBV) regulates the currency market through interventions in buying and selling activities, the announcement of interbank rates, and the capping of spot exchange rates, while also controlling the percentage change in forward exchange rates Although these policies may limit the growth of the foreign exchange market, a complete float of the exchange rate is not feasible due to macroeconomic considerations Therefore, exchange rate management must be approached gradually and with caution.
In recent time, exchange rate is extended its amplitude in a range of 2% - 3% in
2012 (guaranteed by Governor Nguyen Van Binh) After raising the magnitude, if:
The market's failure to fully utilize the upper band indicates that supply and demand are accurately reflecting market needs Consequently, the State Bank of Vietnam (SBV) may consider expanding the bandwidth to better accommodate these market dynamics.
The market frequently operates at the upper band, indicating that the exchange rate is below the equilibrium level Consequently, the State Bank of Vietnam (SBV) can adjust the exchange rate appropriately to prevent market shocks.
In long term, the bandwidth should be removed SBV should interfere in
FX market in the way to benefit for the economy, but not directly fix exchange rate.
Additionally, it should use to interest tools to manage FX market.
Expanding and improving foreign interbank market
Foreign interbank market is a trading place amongst credit institutions.
The interbank market, supervised and operated by the State Bank of Vietnam (SBV), mitigates negative effects on the foreign exchange (FX) market In developed economies, this market operates efficiently, accounting for 85% of total FX trading To enhance the interbank market's effectiveness, several recommendations can be implemented.
SBV will play its role as the last trading player in FX market Besides,
SBV also joins in the market and carries out all FX operations as forward contracts, swap contracts to support commercial banks and help them actively trade in the market.
Currently, the interbank market consists of only 60 participating institutions, leading to a one-sided transaction dynamic where some banks exclusively sell while others only buy This imbalance results in low market liquidity and a lack of equilibrium between the demand and supply of foreign currencies To enhance market functionality, it is essential for key banks to act as foundational pillars, fostering an environment that encourages the participation of smaller banks in the market.
SBV could set up interbank market via two channels: foreign market between all commercial banks, and one via brokerages.
SBV could establish Vinaforex associations to exchange and share experiences, and also open training courses, that specializes in FX, to its members
Improving quoted exchange rate methodology
Traditionally, the Vietnamese Dong (VND) is pegged to the US Dollar (USD), which is considered a stable currency with a low inflation rate In contrast, the VND experiences significant fluctuations and a higher inflation rate Consequently, when the USD appreciates against other currencies, the VND tends to appreciate as well, and the opposite occurs during depreciation Unpredictable changes in the USD's value can pose implicit risks to Vinaforex operations To reduce the VND's dependence on the USD, the State Bank of Vietnam (SBV) can implement various strategies.
Diversification foreign currencies in international trade Using some strong currencies, account for particular proportion in international payment.
The State Bank of Vietnam (SBV) may implement a strategy using a basket of foreign currencies, including popular options like USD, EUR, GBP, JPY, CNY, and CAD, to determine the exchange rate of the Vietnamese Dong (VND) While individual currencies may fluctuate in value over time, the overall valuation of the VND, anchored to this currency basket, will remain stable This approach aims to maintain a consistent exchange rate for the VND amidst varying currency dynamics.
VND will be very objective regarding to others.
In developed foreign exchange (FX) markets, FX brokerage firms serve as crucial intermediaries, connecting customer supply and demand These firms facilitate foreign transactions between commercial banks by matching their quoted rates, simplifying the buying and selling process Typically, brokers operate solely on behalf of their clients rather than trading for their own accounts, earning revenue through service fees and commissions from both banks involved.
Trading via brokers will be more benefits than directly amongst commercial banks due to several reasons as below:
If a bank want to long or short foreign currencies will be spread out widely and speedy
The name of the bank is kept confidentially
Exchange rate matching by brokers is the best rate (called inside rate, to see the mechanism refer to appendix 5)
Could be applied for both spot and forward transactions
Even Vinaforex does not have brokerage firms recently; SBV can step by step run this plan in long term Also, SBV can allow some strong banks (like Agribank,
BIDV) establish subsidiary company to specialize in this field
In summary, basically, Vinaforex is only operated in the boundary of a country.
The participation of commercial banks in international FX market is limited Hence,
Vinaforex needs to be developed progressively to contribute an essential part in national integration.