The use of derivatives in risk hedging at vietnam commercial banks,graduation thesis

MINISTRY OF EDUCATION AND TRAINING STATE BANK OF VIET NAM VIET NAM ACADEMY OF BANK - - GRADUATION THESIS Topic: THE USE OF DERIVATIVES IN RISK HEDGING AT VIET NAM COMMERCIAL BANKS Thesis Supervisor: MA Trần Thị Xuân Anh By: Đặng Thị Hạnh Class: ATCB, Faculty of Foreign Languages June, 2013 Graduation Thesis Viet Nam Academy of Bank DECLARATION I declare this thesis entitled “The use of derivatives in risk hedging at Viet Nam commercial banks” is the result of my own research except as cited in the references The thesis has not been accepted for any degree and is not concurrently submitted in candidature of any other degree Signature Đặng Thị Hạnh Graduation Thesis Viet Nam Academy of Bank ACKNOWLEDGEMENT During the completion of this thesis, I have received remarkable support from many people and I am grateful to all of them It is with immense gratitude that I acknowledge the support and help of my thesis supervisor, M.A Tran Thi Xuan Anh, who thoroughly instructed me to accomplish this thesis, offered guidance and helped me make needed preparations Her good advice, support and friendship, has been invaluable on both an academic and a personal level, for which I am extremely grateful I am also grateful to all staff at Viet Nam Technological and Commercial Joint Stock Bank – Thang Long Branch, who have spared their precious time and created a welcomed condition for me during the time I was taking field study there This thesis would not have been possible without the support of my beloved teachers, staff and friends at Foreign Language Department, Viet Nam Academy of Bank, who have continuously inspired me to continue my work in this field Special thanks are owed to my parents and two younger sisters, who have supported me throughout my years of education, both morally and financially and endured this long process with me Graduation Thesis Viet Nam Academy of Bank ABSTRACT This thesis provides an analysis and evaluation of using derivatives in risk hedging at Viet Nam commercial banks ranging from concept, characteristics, classification to the methods investors use them on the market Methods of the results include taking field study, collecting and analyzing primary and secondary data The report points out that derivatives market is a really promising one in which businesses, especially banks can make optimal use of so that certain risks could be hedged By combining types of derivative in an appropriate way, banks are sure to prevent themselves from suffering adverse fluctuations in their banking business Finally, after discussing some suggestions for banks to apply derivatives instrument in a suitable way, the thesis proposes several recommendations to improve the efficiency of using derivatives including those for Government and for State Bank of Viet Nam Graduation Thesis Viet Nam Academy of Bank LIST OF ABBREVIATIONS Number Abbreviation Original OTC Over-the-Counter WTO World Trade Organization GDP Gross Domestic Product NSE National Stock Exchange BSE Mumbai Stock Exchange PVFC Petro Viet Nam Finance Join Stock Corporation BIDV Bank for Investment and Development of Viet Nam SBV State Bank of Viet Nam BIS Bank for International Settlements 10 MB Military Commercial Joint Stock Bank 11 VCB Joint Stock Commercial Bank For Foreign Trade Of Viet Nam 12 13 ACB Asia Commercial Joint Stock Bank GP Global Petro Commercial Joint Stock Bank VIB Viet Nam International Commercial Joint Stock 14 Bank VP Viet Nam Prosperity Joint Stock Bank 15 HSBC HSBC Bank Limited 16 FRA Forward Rate Agreement 17 FFD Forward Forward Deposit 18 VND Viet Nam Dong 19 USD United States Dollar 20 EUR Euro 21 CAD Canadian Dollar 22 AUD Australian Dollar 23 GBP UK Pound Sterling 24 JPY Japanese Yen Graduation Thesis Viet Nam Academy of Bank 25 SGD Singapore Dollar 26 HKD Hong Kong Dollar 27 CHF Swiss Franc 28 CNY Chinese Yuan Renminbi 29 Rs.Cr Rupees in Crore 30 Graduation Thesis Viet Nam Academy of Bank LISTS OF TABLES AND DIAGRAMS LIST OF TABLES Number Name Page Table Comparison of key features between forward and futures contract Table 2.1 Number of commercial banks through years 20 (1997-2012) Table 2.2 Overview of derivatives operation in some Viet 23 Nam commercial banks Table 2.3 The proportion of derivatives in income and profit 24,25 in BIDV and Vietinbank (2009-2012) Table 2.4 The proportion of forward transactions in 28 contracts in 31 VinaForex Table 2.5 Value of Commodity future Techcombank (2008-2012) Table 2.6 Sales of currency option in ACB and Eximbank 32 (20010-2012) Table 2.7 Currency Swap Transaction in Eximbank 36 Table 2.8 Currency Swap Transaction in Sacombank 37 LIST OF DIAGRAMS Number Name Page Diagram Charter Capital of Commercial Banks in 2012 21 Graduation Thesis Viet Nam Academy of Bank TABLE OF CONTENTS INTRODUCTION CHAPTER 1: THEORETICAL FRAMEWORK ABOUT DERIVATIVES AND THE USE OF DERIVATIVES AT COMMERCIAL BANKS 1.1 THEORETICAL FRAMEWORK ABOUT DERIVATIVES 1.1.1 Definition of derivatives 1.1.2 Characteristics of derivatives 1.1.3 Classification of derivatives 1.1.4 Function of derivatives 10 1.2 RISKS IN THE PERFORMANCE OF COMMERCIAL BANKS 12 1.2.1 Definition and business nature of commercial banks 12 1.2.2 Main risks in the business of commercial banks 12 1.2.3 Types and reasons for risks in banking business 13 1.2.4 The use of derivatives in risk hedging in commercial banks 16 CHAPTER 2: SITUATION IN USING DERIVATIVES IN RISK HEDGING AT SOME VIET NAM COMMERCIAL BANKS 19 2.1 AN OVERVIEW OF COMMERCIAL BANKS AND DERIVATIVES MARKET IN VIETNAM 19 2.1.1 An overview of Viet Nam commercial banks 19 2.2.2 An overview of the performances of Viet Nam banking system 20 2.2.3 An overview of Viet Nam derivatives market 21 2.2 IDENTIFYING MAIN RISKS IN THE PERFROMANCE OF VIET NAM COMMERCIAL BANKS 24 2.3 SITUATIONS OF USING DERIVATIVES IN RISK HEDGING AT VIET NAM COMMERCIAL BANKS 26 2.3.1 Forwards 26 2.3.2 Futures Contracts 28 2.3.3 Options 30 2.3.4 Swaps 34 Graduation Thesis Viet Nam Academy of Bank 2.4 ANALYSIS OF DERIVATIVES DEVELOPMENT IN RISK HEDGING IN SOME COMMERCIAL BANKS 37 2.4.1 Achievements 37 2.3.2 Weaknesses 38 CHAPTER 3: SOLUTIONS TO THE DEVELOPMENT OF DERIVATIVES MARKET IN VIET NAM 42 3.1 EXPERIENTIAL LESSONS IN SOME COUNTRIES IN THE DEVELOPMENT OF DERIVATIVES MARKET 42 3.3.1 Lessons from some countries in the world 42 3.3.2 Experiential Lesson for Viet Nam 43 3.2 OPPORTUNITIES AND THREATS IN DERIVATIVES DEVELOPMENT 44 3.2.1 Opportunities 44 3.2.2 Threats 45 3.3 SOLUTIONS TO INCREASING THE USE OF DERIVATIVES IN RISK HEDGING AT COMMERCIAL BANKS 47 3.3.1 Macro Solutions 47 3.3.2 Solutions from commercial banks 52 3.3 Solution from customers 56 3.3.4 Recommendations to develop derivatives transactions in Viet Nam commercial banks 56 CONCLUSION 58 Graduation Thesis Viet Nam Academy of Bank INTRODUCTION Problem Description Being introduced in the seventeenth century, derivatives spent such a long time to develop and perfect themselves The development speed of these instruments surge significantly after the crisis in 1973 and reached a peak of 24% / year in the last years, creating a globally-linked derivatives market Derivatives have helped businesses around the world become more efficient in risk hedging throughout every major crisis Meanwhile, speculators and arbitrage trading also obtained giant profits from flexibly combining derivatives transactions with other different financial instruments Such a large role has made derivatives market blossom not only in developed countries such as UK, USA, Japan but also developing countries like China or India With a strongly –integrated economy as Viet Nam’s , derivative contracts would be a useful instrument to help enterprises in risk hedging However, despite being introduced from the late 1990s, Vietnam derivatives market has not been paid much notice of up to now Forward and swaps transactions are of the greatest interest Option and futures contracts are rarely used Reality has shown that Vietnam businesses are still faced with enormous risks from market volatility without any precautions Besides using of derivative instruments for the purpose of risk hedging, banks play a central role in developing strategies of Vietnam derivatives market As a pioneer in the use and development of derivatives contracts, commercial banks is the key to spreading these financial instruments widely in financial market, promoting derivatives market development in Vietnam Because of the above reasons, I decided on the topic: "The use of derivatives in risk hedging at Viet Nam commercial banks” to take a deep look at current derivatives market and provide some solutions to develop this type of business for Vietnam commercial banks Graduation Thesis 46 Viet Nam Academy of Bank On the other hand, when signing or selling derivatives contracts with foreign banks, Vietnam commercial banks will face many constraints in terms of applicable law While Vietnam has no formal source of law adjusting the relationships among participants using financial derivatives instruments, these developed countries in the world have been perfecting its coherence This suggests that, when dealing with foreign partners, Vietnam commercial banks have not received the protection and implementation of appropriate guidelines and this will surely put them at a disadvantaged position, especially when disputes occur In addition, commodity market and financial market in Vietnam have not yet developed and the efficiency is not high enough, which leads to herd mentality and makes participants respond in the same way Meanwhile, policy and law have usually been changed All these problems make it difficult for banks to calculate the contract value Another challenge posed to commercial banks is that they are required to develop and build derivatives professions of high uniformity The use of derivatives contracts to date is only at the first stage by focusing on a number of banks Domestic banks not have the kind of campaign services to businesses and other organizations What’s more, the propaganda and marketing of its effects in risk prevention making profit for companies and individuals by banks remain a big question mark in the banking system While derivatives instruments in the world were introduced nearly centuries ago, they have just been around in Vietnam market for more than ten years ago Therefore, widening the knowledge of derivatives, financial markets and how to trade the derivatives contracts in order to be comparable to the oldest commercial banks in the world is indeed a big challenge set for Vietnam commercial banks/ In a financial market that is still under the control of the State and less volatile as in Vietnam, it is relatively difficult for banks to quickly integrate with the movement of the world's largest playground Since the environment for the development of derivatives instruments in Vietnam has not been completed as in the developed countries, Vietnam banks should adapt and learn from the world's major Graduation Thesis 47 Viet Nam Academy of Bank banks Having that, chances are that it would facilitate the development of derivatives at commercial banks in the country 3.3 SOLUTIONS TO INCREASING THE USE OF DERIVATIVES IN RISK HEDGING IN COMMERCIAL BANKS 3.3.1 Macro Solutions  Improving the legal system relating to derivatives instruments The legal system of financial instruments needs to be specified in the official legal documents and cannot be stopped at the level of guidance documents The official legal documents with high popularity will help the market operate and regulate derivatives, contributing to their smoothness and widespread acknowledgement The next action to take is that the State should plan a separate legislation to adjust complex relations and activities related to derivatives In the current situation, when Vietnam has just been initially international integrated and foreign transactions have increased in number and value, the birth of this law , which solves the problem of hedging and making profits derived from operations, is an urgent matter There is a certainty that the State should develop a roadmap for years to draft the law and implement the first step on derivatives development Clearly, the law on derivatives should stipulate specifically about: - Standard terms of legal status, credit rating, the amount of minimum capital, required documents allowing individuals and legal entities participate in the derivatives market with the purpose of risk hedge, speculation and arbitrage - The derivatives allowed to be circulated on the derivatives market, the standard of value and duration of these instruments - The basic content of derivatives contract accompanied with the requirements of this content - Transaction process of each type of derivatives instruments, the rights and obligations of the parties in relation to the transaction, trading, brokerage of all kinds of derivatives instruments Graduation Thesis 48 Viet Nam Academy of Bank - Activities of future exchanges, options exchanges in order to build up a centralized exchange for two types of tools and to ensure the law is likely to welcome the new trend - International exchange on derivatives instruments An important point to promote participants in derivatives market is that regulations on use of derivatives should be loosened They should allow investors to benefit from speculation and arbitrage, not just use derivatives to hedge If so, derivatives market would be an attractive cake thanks to the fact that because businesses can simultaneously earn profits and defend themselves from risks To ensure that speculative activities are allowed to take place but not affect the price, the law can allow deployment options providing the conditions specified on the ceiling and floor price For brokers on derivatives contracts, capital requirements are extremely important because they help the system of Vietnam commercial banks to reduce the risk of willing to take risks to avoid broker’s inability to pay In addition, to ensure the sustainability of the derivatives market, re-hedging in the international market should be compulsory, thus controlling and demanding domestic banking system not to bear risk from the purchase of option contracts or futures With the law on financial institutions, legal documents of Vietnam should introduce widely about derivatives instruments as part of risk management activities in banks It would, therefore, be more favorable in the organization of derivatives management within banks In addition, the legal documents also need to create the conditions for financial institutions to participate in to make profits from trading derivatives For options, swaps, futures , there should soon have official documents on standards so that the commercial banking business is allowed to conduct these tools without just putting a stop at the level of pilot Civil Law, Commercial Law and Investment Law should also be amended From then, the contractual relationship in general, as well as commercial contracts, import and export contracts will be in line with international standards, enabling more foreign businesses investment Graduation Thesis 49 Viet Nam Academy of Bank For the Law on Stock, the State and related authorities should establish and implement guidelines bylaws so as to aim towards a stock market which is methodically, thoroughly, transparently operated and simple administrative procedures In particular, the Securities Commission must consider banning on short-selling and determine reasonable range in which short selling is acceptable because short selling, in fact, is an indispensable condition for futures market  Improve and develop commodity market and financial market Commodity market To develop commodity derivatives, it is necessary to promote import and export activities This will indirectly enhance the development of the commodity derivatives market Specifically, in order to quickly develop the derivatives market, the demand for goods that are exported in large quantities, suffer price fluctuations and come from unstable sources such as rice, coffee, cashew nuts, high rubber, pepper To gradual improve the quality and prestige of Vietnam exports in regional markets as well as international one, enterprises should focus on branding, exports should be standardized, enabling the evaluation of the product and pricing commodity derivatives contracts Specifically, commodity exchange should be centralized and avoid fragmentation of trading so that Viet Nam commodities could have a firm position and good voice in international market The stock market There should be some solutions to making Vietnam stock market modern, transparent, well organized and be consistent with international standards - Implement depository operations, centralized securities settlement and risk management; Standardize all activities of the securities depository center; Gradually develop and improve the operations of the securities depository center by international standards - Quickly complete equitation of State enterprises and their share issuance to the public; Give out tax incentives in order for the Issuer to be motivated and increase the amount of the original securities of derivatives securities Graduation Thesis - 50 Viet Nam Academy of Bank To curb insider trading, misuse of information from the equitation of enterprises, it is considered that the Securities Commission should be transferred into an independent state agency Securities Exchange should be separated from Securities Commission - For bonds, the first and foremost is still government bonds, they need to be diversified to match the goals of diverse investors, including hedge objective Next comes the development of derivatives of interest rate hedging based on the underlying asset as bonds Secondary market of bonds should also be developed to increase the liquidity of bonds Money market Money market should be targeted towards a freely convertible national currency Initially, it is necessary to facilitate VND to be more flexible in the country The market needs be more open in the control stage of the supply and demand of foreign currency and foreign currency transactions This will increase the demand for derivatives instruments and commercial banks- which has much experience about forex trading will be more motivated to provide better services It is a must to require a more flexible exchange rate mechanism, creating a foreign exchange market to reflect the relation between supply and demand for foreign currency State Bank should continue to expand this range to suit the market better This is the basis for banks as well as businesses to get accustomed to the tools used to exchange rate hedging or trading The role of State Bank on foreign currency market needs to be strengthened That is to say, SBV should well perform the function of the final buyer, seller and control a moderate intervention in this market Specifically, a reasonable level of the floor price should be given to adjust interbank rate effectively For VinaForex activities, it is necessary to orient in the right way so that VinaForex could be developed both in regional and international market This will help increase the selling demand, increase foreign exchange, thereby increasing demand for derivatives instruments Besides, a financial market necessarily requires market makers To become a market maker, it should be noted that large capital, professional staff and Graduation Thesis 51 Viet Nam Academy of Bank methodical organization are needed There should be some appropriate measures to encourage organizations and businesses to become market makers, especially banks which have been financial intermediaries and made large number of transactions relating to securities, foreign currencies  Complete accounting and tax regulations - The essential content, background and basic principles need to be thorough - Unimportant contents should be removed - For contents that are not suitable for low level of development of Vietnam market, there should be more caution For example, for the fledgling market in which many non-economic factors are affecting market prices, financial and accounting regulations should not allow revaluation of assets - Enterprise should follow the system with accounting standards in the country, Concerning tax, it should be careful to adjust the tariff rate accordingly, in the direction of facilitating traded goods in bulk and balancing between exports and imports to increase demand for higher derivatives In addition, attention must also be paid to improving the capacity of operating and monitoring of market activities as well as ensure fairness and protect the rights and interests of involved participants  Establishment of Derivatives Stock Exchange After a period of a few simple products such as futures contracts, options, warrants being traded on the stock and bond market, a separate Derivatives Stock Exchange and the development of individual derivatives as well as mixed derivatives should be taken notice of The appropriate model is state ownership or individual ownership with member as brokerage firms or combined ownership, depending on the physical condition of the security companies Regarding products, development priorities should be put on futures contracts on stock indices (simple, popular and useful as stock indicators of stock exchange are very easy to set up, while the demand for hedging barrier of futures contracts on stock indices is rising) and futures contracts on short-term interest rate (fluctuations of short-term interest rates over those time and the impact of the Graduation Thesis 52 Viet Nam Academy of Bank widespread short-term interest have proven how necessary an interest rate hedge service should be) For clearing activities on the basis of trading derivatives, there should be only a central clearing center under the control of SSC or an independent organization which is responsible for meeting the requirements of SSC 3.3.2 Solutions from commercial banks  Bank leaders need to be fully aware of the necessity of the use of derivatives instruments In Vietnam today, derivatives are still very new and even strange to bank leaders and staff This service is quite challenging technically but really means a lot to banks in the process of risk management in banking business To be able to shape and develop the derivatives business, it firstly requires the leaders in Vietnam banks to be well conscious of and stand in a good view when implementing this operation in reality In addition, banks need to understand the features and advantages of the Vietnam derivatives in hedging of economic subjects, particularly for Vietnam banks Only when banks have been aware of the necessity of implementing this service for the prevention of major risks triggered for banks as well as the bank's customers will its deployment no longer be a difficulty There are two forms of organization that banks can use to establish separate derivatives operations department or rotate derivatives officers to other departments Based on economic development in Viet Nam these days, the second option would be more appropriate In this way, banks would reduce transaction costs and provide better corporate treatment for their staff However, management issues should be paid much special attention to in this case The difficulty of this kind of organization is that there would be some bankers who are not technically knowledgeable being responsible for derivatives activities If leaders are experienced and trained, derivatives trading by this way will be of less risk, high effective risk management and high profitability  Strengthen the marketing of derivatives products Through the above analysis, it could be found that the conditions for successful implementation of derivatives tools must come from three sides: (1) The Graduation Thesis 53 Viet Nam Academy of Bank legal provisions from Central Bank and the related authorities (2) The availability from the banks facilitating human resources conditions, facilities and processes (3) Public understanding and willing to engage in (including individuals and businesses) Therefore, banks need marketing activities for propagandizing and giving both guidance and advice to the public about the content and the effects of using financial derivatives instruments, as well as issues related techniques In fact, many banks around the world have introduced the derivatives on the bank's website to improve customer access to these products In terms of Vietnam’s development conditions, due to the limitations of technology banks can use other forms of marketing such as brochures, seminars, conference in order to introduce new products to clients Besides, training centers of banks should organize short-term training course so that their customers can grasp basic knowledge about functions, techniques of derivatives  Develop the quality of Human Recourses The difficulty of the commercial banks in Vietnam in the development of derivatives products is that level of development of domestic banks is rather low whereas modern banking operations are still limited If a bank wants to use derivatives flexibly, it is firstly a must that the understandings of derivatives transactions are fully acquired by bank staff Therefore, banks should organize training programs to equip with the knowledge and techniques of derivatives transactions, skilled technical analysis, fundamental analysis and analysis of information for bank staff to predict the trend of market developments so as to use derivatives transactions in an efficient manner In addition, domestic and foreign experts can be invited; capable employees may be sent abroad to study not only in theory but also in practice the implementation of these transactions at the bank To those employees who are really interested in learning and improving professional skills, the banks should encourage and motivate them by favorable treatment The next thing that commercial banks should concern about is recruitment process Those who are employed need to be technically knowledgeable and Graduation Thesis 54 Viet Nam Academy of Bank possess a wide range of economic, financial, legal and pricing knowledge on derivatives Clearly, commercial banks should issue specific and reasonable policy on how to make use of the talented, creating favorable conditions for their creativity and innovation development  Equipped with the appropriate technology In banking business, technology makes a great influence on t product development, product quality and product delivery method as well as the ability to manage business banking Particularly, during the implementation of derivatives transactions, technology lays a direct impact on the process of providing and processing information to make a decision in transaction, affects calculation results and payment process, as well as risk control process Therefore, to establish and develop derivatives, commercial banks are required to have a certain investment in human resources and capital with the aim to modernizing applied technology In addition to the facilities and equipment available of Reuters, Thomson and Dow Jones News, risk management software and modern charging for derivatives transactions should be taken into account because when derivatives are sold for enterprises, they become risk protection tools; however, when used for speculation, they themselves are also placed at risk  Strengthen internal control mechanism Highly competitive environment and technological innovation speed have posted several problems for the control system Bank should not engage in trading before limitations are set and an appropriate control system is approved Board of directors should have a written policy that circulates the entire business operations of the bank Although the ability to make quick decisions is a key factor for success in business, but to ensure safety, banks need review the risk assessment structure and accounting system as well as their management mechanism to secure that decisions are made on the basis of adequate information about the risks Risks due to lack of adequate control tends to increase as the market has been increasingly complex Therefore, banks should ensure that all expected risks and actual risks must be made within the prescribed limits The second thing is to Graduation Thesis 55 Viet Nam Academy of Bank make sure that all expected risks and actual risks must be evaluated independently, risk for each partner is reviewed and verified together In case that credit risk changes along interest rates, the banks need to regularly re-evaluate risk and determine whether there is real risk of setting limits or not Because derivatives transactions, especially options, are mostly based on computer system, banks should also have backup equipment to prevent computer crashes Both internal auditors and external auditors should check whether the system lives up to expectations, including giving a check for technical competence of the personnel involved as well as evaluating the actual data on overall risk in certain time  Expand partnership with foreign banks The use of derivatives financial instruments in Vietnam commercial banks is relatively new and still insufficient Therefore, stepping up the cooperation with foreign banks will not only help Vietnam banks learn a lot of experience but also enlist the support of knowledge and system for risk analysis management for all types of derivatives transactions  Develop new derivatives products To find more customers, it is important to diversify derivatives products Viet Nam commercial banks, to develop its derivatives business, should find or acquire, develop derivatives products together and combine with other financial instruments It would definitely take advantage of the available demand for other financial products that can satisfy customers better because the benefits are integrated into the same product Currently, since market demand for debt instruments is quite high, banks should consider the development of derivatives instruments related to debt or a combination of the debt instruments - Bonds that pay interest when due together with a premium calculated on the price movements of the underlying asset and within a certain limit - Foreign currency bonds with rates within specified limits The amount received at maturity depends on whether the exchange rate at maturity is beyond or within such limits, but not less than the principal amount - Two interest rate options Graduation Thesis 56 Viet Nam Academy of Bank Commercial banks should consider their strengths to provide suitable kind of financial instruments to integrate with derivatives instruments accordingly 3.3 Solution from customers In addition to the above solution, if the derivatives market wants to be truly sustainable, a necessary condition is that businesses who are both banks’ partners and bank’s customers must be equipped with certain knowledge about the financial and monetary market, trading operations, especially derivatives transactions, foreign exchange risk, interest rate risk and how to manage them A culture of corporate responsibility must be clearly defined Businesses need to clearly define the responsibilities of risk management within the company and clearly stipulate the financial risk level for leading positions and for each given area Specifically, for each leading position and for each region, the extent to which they are allowed to take risks and to which they should make risk prevention must be apparently stated In addition, businesses need to link with banks and take initiative to building relationship and partnership with major exchanges so that Viet Nam derivatives products are made available on the international market 3.3.4 Recommendations to develop derivatives transactions in Viet Nam commercial banks  Recommendations for Government From these studies, a number of bold proposals to the Government can be listed as follows: - Creating favorable conditions for SBV and commercial banks to unleash their creativity in the development of derivatives transactions by turning rules relating to derivatives instruments already issued into a law reserved for the derivatives - Completing accounting regulations in accordance with international accounting standards, and adjust mechanism for taxing on come arising from derivatives transactions - Promoting export activities of domestic enterprises by issuing policies for preferential loans with low interest rate or 0% interest rate for enterprises exporting encouraged commodities Graduation Thesis 57 Viet Nam Academy of Bank - Establishing centralized commodity exchanges, defining quality standards to be achieved, standardizing Vietnam exports to facilitate in product pricing and valuation of derivatives contracts - Constructing Derivatives Commission similar to the State Securities Commission, but managed object of the committee is derivatives instruments - Paying more attention to strengthening and stabilizing financial market, building a healthy economy of transparency and sustainability, creating favorable conditions to encourage the development of derivatives markets  Recommendations for State Bank of Viet Nam There is no denying that Central Bank plays a big role in promoting derivatives transactions in Vietnam commercial banks As discussed in the previous section, the compulsion and restraint on the policy of the central bank have created many difficulties for derivatives market For example, many cumbersome and timeconsuming legal procedures needed for the implementation of derivatives transactions were presenting obstacles for the banks to participate in this market Therefore, a number of recommendations for SBV in developing derivatives transactions in Vietnam commercial banks as are given follows: - Loosen the management of derivatives transactions - Gradually increase the value of domestic currency on the world market, build a flexible operating mechanism of interest rate in order to create an exchange market reflecting the supply and demand for foreign exchange - Strengthen the cooperation with commercial banks and international organizations in the transparency of financial information so that unwanted risks could be limited and the market’s volatility is reduced - Conduct training courses on derivatives and necessary skills for derivatives transactions for bank staff to provide them with the most basic knowledge of derivatives From that, commercial banks will be able to enhance their creativity in self-designing derivatives products for themselves - Establish common rules and standards such as form and content of some basic derivatives contracts such as futures contracts in order to reduce risk and create conditions that promote the dissemination of such contracts in the market Graduation Thesis 58 Viet Nam Academy of Bank CONCLUSION It can be said that derivatives are one of the most effective tools for risk hedging in commercial banks Developed nations all around the world have successfully used this type of financial instrument; however, the story is rather different in Viet Nam For the first time, Vietnam has started applying derivatives since 1998 but in a quite gloomy and restricted manner In fact, derivatives investment has not been paid much banks’ attention However, positive results that derivatives have brought about are making these instrument an increasingly better playground for banks to take part in Based on Vietnam stock market analysis and a deep insight into how derivatives will well perform their risk hedging function as well as the current conditions in Vietnam, the thesis points out that it is time to fully apply derivatives in Vietnam's stock market However, the roadmap for developing derivatives markets should be examined slowly and carefully in order to be effectively promoted and contribute to the completion of Viet Nam stock market structure and the development of derivatives market Graduation Thesis Viet Nam Academy of Bank REFERENCES Books: John C Hull, sixth Edition – 2006, Options, Futures and other Derivatives Peter S.Rose, 2008, Sylvia C.Hudgins, Bank Mannagement and Financial Services, seventh edition, pp.252-258 Alan C Shapiro, 4th edition – 1996, Multinational financial management,the University of Sourthern California Bank for International Settlement, 1998 – 2009, Trienial Central Bank Survey of Foreign Exchange and Derivatives Market Activity Don Chance, 8th edition – 2009, An Introduction to Derivatives and Risk Management, Thomson South Western Eugene F Brigham, Joel F Houston, 2009, Essential of Financial Management, Cengage Learning Jeff Mandura, 7th edition – 2006, Financial Markets and Institutions, Thomson PhD To Kim Ngoc, 2008, Analysis of Stock Market, Statistics Publisher, Ha Noi PhD Nguyen Van Tien, 3rd edition - 2009, International Finance, Statistics Publisher, Ha Noi 10 PhD Nguyen Van Tien, 2nd edition - 2005, Risk Management in banking system, Statistics Publisher, Ha Noi 11 Annual reports, financial reports of some Viet Nam commercial banks: Eximbank, Sacombank, Techcombank, ACB, BIDV,HSBC… from 2009 -2012 Websites: www.acb.com.vn www.bidv.com.vn www.eximbank.com.vn www.hsbc.com.vn www.militatybank.com.vn www.sacombank.com.vn Graduation Thesis www.techcombank.com.vn www.vcb.com.vn www.vib.com.vn www.vietinbank.vn www.sbv.gov.vn www.bis.org http://www.bis.org/statistics/index.htm http://caohockinhte.vn/forum/showthread.php?=3859 Viet Nam Academy of Bank