foreign exchange exposure management at viet nam international commercial joint stock bank

UNIVERSITY OF NICE – SOPHIA ANTIPOLIS IAE School of Business Administration --- INTERNSHIP REPORT ON FOREIGN EXCHANGE EXPOSURE MANAGEMENT AT VIETNAM INTERNATIONAL COMMERCIAL JOINT STOCK

COMPANY BACKGROUND

Key Factors of the Company

 Company name: Vietnam International Commercial Joint Stock Bank

 Head Office: 1st, 6th and 7th floor, CornerStone Building, 16 Phan Chu Trinh Street Phan Chu Trinh Ward, Hoan Kiem District, Hanoi, Vietnam o Phone: 046 276 0068 o Fax: 046 276 0069 o Website: vib.com.vn o Email: vib@vib.com.vn o Hotline: 18008180

Company development history

Vietnam International Commercial Joint Stock Bank, abbreviated name International Bank (VIB) was established September 18,1996 Since its inception, the VIB has continuously flourished with outstanding business achievements and been repeatedly recognized as a reputable financial institution.VIB is gradually asserted brand reputation in financial monitory market, providing high quality services to make a difference in the style of service; and implementing social responsibility of enterprises, benefiting the community and adding value for shareholders After 20 years of operation, the total assets of nearly 86 trillion VND, chartered capital 4,845 billion VND, equity was nearly 9,000 billion VND VIB has nearly 4,000 employees serving customers in nearly 160 branches and transaction offices in over 27 provinces / cities nationwide focus

• In typical bank "Bank of the Year"

• Top 5 bond trading on Hanoi Stock Exchange

• Top 10 banks to implement Basel II, the bank had capital adequacy ratio (CAR) Highest Basel II implementation

• Won the Bank has branches in Vietnam Typical 2014 and the "information technology Leadership Excellence" in Southeast Asia organized by IDG

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• Top 135/1000 Enterprise of Vietnam's largest taxpayer by New York Times, GDT and organizations VietnamReport organization

• Winner of the award for "Enterprise shall implement the Social Protection and Community Development" for positive social activities

• Award "Bank implementation of international payment operations excellence" by HSBC Global award

• Won the Excellent Brand Award 2012 by Vietnam Economic Times organized

• Top 500 largest enterprises in Vietnam by the New York Times held in cooperation with the organization Vietnam Report.

Business activities

Mobilize capital can be understood that the tools, ways and methods, and specific programs to attract the attention of individuals, organizations in order they send money to banks, based on the two sides benefit So it can easily to see that the funding policy of a commercial banks are also part of the marketing policy which the bank uses In recent years capital mobilization activities in VIB activity, achieved in large quantities Specifically over the years as follows:

Fig.1:Capital mobilization of VIB in years 2013- 2015

Pursuant to the Decision No 324/1998 / QD-NHNN of the Governor NHNN1 Vietnam dated 30/09/1998 promulgating regulations on lending by credit institutions to customers, the credit activity of banks VIB focuses primarily on the following areas:

Banks for borrowers to implement investment projects of production and business development, services and investment projects in service of life This form applies to the case of medium and long term loans

This form of credit by which banks for borrowers to buy property and goods when the customer does not have enough money to pay once When borrowers, lenders and customers to identify and agree on the amount of loan interest paid plus the amount of principal repayment is divided according to multiple terms of the loan term Assets purchased with loans owned by the parties only after they pay the full loan principal and interest owed to the bank With this form, to get a loan customer must have a plan for repayment of principal and interest feasible by earnings-based solid, stable

* Lending through the operation of issuance and use of cards

Credit activity is one of the banking operations This activity brought no small profit to the bank With this method, the bank allows customers within limits for payment for goods and services at sales establishments accepting card payments or cash withdrawals at automated teller machines Credit forms that give customers high autonomy and save time

International payments is the implementation of the monetary obligation, arising on the basis of economic activities and non-economic between organizations or individuals with individual organizations or other countries, or between a countries with an international organization, often through the relationship between the Bank of the relevant countries International payment operations increase the liquidity of banks When performing the international payment operations, banks can attract foreign currency funds temporarily idle enterprises related international payments with banks in the form of deposits pending payment 1.4 Business results:

In 2014, although the world economy and Vietnam not many bright spots, however, VIB has achieved positive financial results VIB continue to promote business activities in the effort to provide superior service to customers while constantly investing in human resources and technology to enhance productivity, efficiency and transport workers operating excellence

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2014, net profit after tax increased VIB 472 billion VND, and profit before tax was 648 billion VND - equivalent to 201% of the plan

COMPANY STRUCTURE AND ORGANIZATION CHART

VIB’s organization and management

VIB’s organizational structure are shows in the following chart

With its monitoring Unit controls the Board of management and Board of director’s competence and activities

BOARD OF DIRECTOR Board of director has built strategic role in the overall and long-term orientation for banks, set financial goals assigned to Board of Management

BOARD OF MANAGEMENT Board of management has specified functions overall

BOARD OF DIRECTOR SHARE HOLDER COMMITTEE

Bu sin ess Ent erpr ise

O pe rat ing Su p p o rt D e ví io n visi o n \

Pu b lic Rel at ion Ce n ter cente r

Rish M an ag em en t

Huma n R es our ce M an ag em ent Acco u tin g D ivisi o n

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6 strategy and objectives, with the business plan , to advise the Board of Director on issues of strategy, policy, directly operating all banking activities

CONTROL BOARD Check, supervise the activities of the VIB system of legal compliance, the legal provisions of the banking sector and the statutes, regulations, business processes of VIB as well as proposals to overcome weaknesses and risks if precautions

Manager - Operating and decide the issues related to the daily operations of the branch in accordance with law, the Bank's Charter, Regulations, Rules and instructions of the Director General, the relevant unit at the Bank facilities, specifically:

+ The management, direct business + The management, recruitment, reorganization, staffing + The management costs, administrative

- Timely reporting of the main office Monthly reports on implementation

- Management and development of the staff

Credit department - Gather information, customer analysis, loan, the appraisal report

- To make proposals and submit reports to competent authorities decide to grant credit, discount, mortgage lending valuable papers according to regulations and business processes of VIB

- Guide customers complete loan applications

- To receive and check disbursement records, the proposed disbursement leadership

- To monitor customer activity, inspection and supervision over the use of loans, collateral loans

- Perform loan classification and credit rating, customer scoring

- Receive and examine the dossier requesting exemption / reduction rate, the proposed exemption / reduction and profit transfer Risk Management Division handled as prescribed

Tellers - Perform transactions at the counter for customer

- Cash flow management in daily trading room

Sales department - Find and develop new customer in line with the credit policy of the bank in each period

- Support customer (VIP customer, Personal customer, Business customer)

- Building a data warehouse of information about customer

- Maintaining and developing relationship with existing customer Insurance department VIB Bank has signed a strategic partnership agreement with the company limited liability life insurance Vietnam Prudential (Prudential) in the insurance business development bank The two sides will focus on the traditional life insurance as well as new products in line with existing clients as well as the majority of VIB general customers nationwide

- Build good relationship with the bank employee to be receiving clients wishing to purchase products from Prudential introduced bank staff

- Perform consulting and explained in detail the benefits, product specifications, regulations and contract terms and customer support insurance contract signed

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- Assist in understanding and choosing locations for expansion advantageous selling point especially in the bank branches and report back to monitor sales at Prudential

- Analysis, evaluation, measurement and control exchange rate risks, recommended treatment measures and reporting

- Comprehensive analysis of the records, the proposed credit / investment proposals of the customer; review and assessment of credit risk / investment independently; Establish risk evaluation reports and the approval of the competent authorities.

The Inter’s position

When practicing at VIB, I was admitted to practice at Risk management Department The department devide to 2 fields of which are Credit risk management and Exchange rate risk management I was join a group Exchange rate risk management My group had 5 people People support each other in their work I was worry when I arrived but the senior was helping and guiding me After 4 months of practice I was really impressed with the professional working environment VIB as well as inclusion of the staff here

THE MISSION: ASSIGNED TASKS AND GOALS

The assigned tasks

Risk management Department have 2 group One group take responsibility for Credit risk management, the other for Exchange rate risk management I am assigned to work as an trainee in Exchange rate risk management and my group have 5 people The main tasks of our group include:

1 Prepare daily reports on the movement of currency and interest rates on the financial market of the country and abroad Especially strong currencies such as US dollars GBP, SGD, JPY ect to forecast interest rates and exchange rates

2 Support other concerned departments to prepare daily reports on market risks, especially exchange rate risk

3 Review and update the data for the internal parts of the collection, searching, processing, storage and distribution of data and information of the rates

Link between the subject matter and mission

My task are collecting data, analyzing the movement of foreign exchange rates, and interest rates , all such things are tightly linked to the topic of “Foreign Exchange Exposure Management At Vietnam International Commercial Joint Stock Bank” The implementing the tasks is a fundamental step to identify daily monetary market risks for VIB and to find the way to manage the risk, namely:

- Collecting data of foreign exchange rates, and interest rateshelps me to understand movements of strong currencies such as USD GBP, SGD, JPY ect and the impacts of the movements on business activities of a bank

- Analyzing the movement of foreign exchange rates, and interest rates and making daily reports support for drawing general picture of the monetary market with unforeseen fluctuation that are necessary experiences for predicting the threat and opportunities of VIB in the globalization context Basing on such experiences and analysis we could suggest solution to mitigate the risk for the VIB

- The meetings with all members of the team to discuss about abnormal information of the monetary markets to prepare daily report are precious chances for me to be shared with experiences of the perennial staff of the Bank, which are helpful for me to implement the Topic

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The goals to reach

Period My own plan Tasks target Activities

Get more information about VIB and the risk management department as well as the coordination between departments

- Aware of the banking system and apparatus operation

- Get to know about the tasks in risk management department: The number of employees in the department, the specific task of each person

- Visit the Head office at 16 Phan Chu Trinh street, Hoan Kiem district, Ha Noi city

- Search relate information from different sources such as web, newspaper and another media to know more about VIB

- Participate in regular discussion and meetings of the department to introduce myself and get suggestions from senior as well

- Make the Survey results about the concern of enterprises to derivative contracts

- Learn about the common types of risk in banking

- Understanding data and developments of domestic and international financial market

- Understand operational risk management tools and risk management processe

100 votes, 95 votes recoverable By means of interviews, collect, aggregate, analyze authors gave the survey results

- Collect and read relevants risk management department’s documents in recent years

Prepare internship report with suggested solution

- Find out and propose solutions in accordance with VIB

- Review all analyses Match results of analysis above with VIB’s actual situation which was studied in the second task to suggest solutions

The results which I can contribute to the company

The data collected from the monetary market research and analysis can gives VIB a deep understanding of the monetary and economic situation in Vietnam as well as in the world Such data and analysis will certainly help VIB in considering interest rates as well as exchange rate and in hedging risk

Recommendations from report are useful for the bank in foreign exchange rate risk management.

Ally theoretical knowledge to practice

During the internship I have been aware of the usefulness of many knowledge acquired from courses of the AMI Master program as listed in the table

Table 2: The MBA course and their usefulness knowledge applied in the internship

1 International Strategy This course helps me understand more about: strategic planning, competitive strategy and competitive advantage, strategic thinking so that strategy theories is applied in my analysis

2 International Management The course introduces, describes, and explains the international business environment in which a contemporary international business organizations operate and introduces methodsto implement international business strategy of a

3 Financial Risk management The course provides knowledge in the risk management of business activities, especially in the context of deep international integration Risk management disciplines are closely linked to the international financial institutionsand multinational companies on issues of exchange rates and the volatility of exchange rates So I have used many knowledge obtained from this course to my internships

Analysis and presentation of international economic integration in some areas, countries and regions, with

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12 particular emphasis on the integration process of Vietnam help me to have the most reasonable and practical look at the adaptation of a country in the context of globalization and international economic integration

5 International Trade payment options and Risk

This course helpsme to understand about the international payment instruments, the conditions of international payment as well as insurance activities About Foreign Exchange Rates, Bank’s Accounting System, Foreign Exchange Market

DEVELOPMENT

Factors affecting the foreign exchange operations of the VIB

In Vietnam, interest rate is decided by State Bank From 2014 to 2015, the interest rates of the banks in Vietnam are relatively stable After some year of remaining low level and getting about 6.0% last year, interest rate in Vietnam may increase to 6.5% in 2016, however is expected to trend to around of 5.0 in 2020 (according Trading Economics) On the currency market, the exchange rate does not fluctuate much Import and export enterprises in Vietnam easily borrow the banks with reasonable interest rates Export operations take place in a good direction

Inflation has a direct impact on interest rates increase Vietnam has recorded low inflation rate in 2014 - 2015, reached the lowest of 0.63% in 2015 since 2006 , which exhibits the increase of Consumer Price Index does not have serious impact on the economy A lower inflation rate of a country shows the loss of currency’s value keeps lesser than that of trading countries with higher inflation rates, meaning the increasing of the country’s currency in compare with its trading partners VIB as well as Vietnamesebanks and import and export enterprises have more chances to do business From causes of banks to lend at low interest rates, this has created favorable conditions for enterprises to borrow the capital

According to report of Vienam General Statistics Office, the 2015 trade deficits of the country hit $3.2 after 3 years of surplus mailly due to import from China Trade deficits are also with other countries as japan and South Korea

Vietnam will face a deficit of under 5% of total export value in 2016 in spite of trade surplus of 2% in the first five months of the year The deficit is mainly due to the import of machinery and materials for infrastructure building and industrial equipment for production

The deficit in current account shows the lower of Vietnam exchange rate currency This will lead to potential risks like financial and monetary crisis in 1997 in Thailand The VND is

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14 devalued against the US dollar while the dollar is depreciated against other currencies in the basket of currencies If USD -VND exchange rate is kept low, export will be benefit whereas imports will face enormous difficulties Vietnam remains a deficit country of raw materials and fuel to serve production

The past year, Vietnam's economy maintained a high growth rate, GDP in 2015 is estimated at 6.68% Thus, this year's GDP growth target of 6.2% was reached at the beginning of the year and reached the highest in 5 years (2011, rising 6.25%, rose 5.25% in 2012, 5.42 in 2013 rose %, rose 5.98% nam2014) This has a positive effect on the business of banking in general and in particular VIB The economy growth is accompanied with investments Bank’s network, including branches and transaction offices, agents have to increase to serve the needs of domestic and international investment’s capital Forex Trading activities also took place more robustly to meet customer demand for international payments or trading Besides enjoying the positive impact of economic growth VIB will also compete fiercely with rival foreign banks which are always prevails in capital, experience and information technology and are attacking this attractive market

Besides economic growth at a high level the political situation in Vietnam is stable Since the liberation of the South, reunification, Vietnam Communist Party has been the ruling party in Vietnam and is the only political party allowed to operate in Vietnam according to the Platform and the charter officially announced Because only 1 single partisan, so all elements of political, economic, cultural program are consistent This is also a very attractive factor for foreign investors to invest into Vietnam and create new demands investment capital This flow of investment, in turn have positive impact in general on banks and in particular in VIB which do not want miss the opportunity to find customers for their services.

Restrict the exchange rate risk by derivative contract

The currency derivative is one of the selections of banks to carry out the exchange rate risk management Derivatives market allows transfer risk from those who want to minimize the risks to those willing to take risks, who are the speculators, traders for profits Therefore, this is an efficient market in the distribution of risk among investors The currency derivatives commonly used include: Forward contract, option contract, futures contract, swap contract

Forward contract is a purchase (sale) contract of foreign currency that its terms and conditions are determined at the time of signing the contract but the terms and conditions will be made on a specific date in the future

Exchange rate used in the contract is forward rate This is the rate mutually agreed and specified in the contract or forward rate published by the bank The forward rate takes effect during the term of the contract

As to the time of maturity, the parties to the transaction shall transfer money to their partners at the rate stated in the contract regardless of the exchange rate at that time

Foreign exchange swap transaction is agreement between banks and other owners simultaneously buying and selling one certain currency for each party, including the dates of buying and selling values are different

Foreign exchange swap contract is a contract to buy and sell a certain foreign currency signed today at the same time Quantity of currency set the purchasing and selling prices for each party is same

At the same time, the banks may also use the swap contract to hedge the exchange rate risk If a bank has a future earnings in foreign currency, it can hedge by the forward selling foreign currency contract If a bank has a foreign currency debt in the future, it may hedge the exchange rate risk by the forward buying foreign currency contract Meanwhile, earnings or debts of the bank are kept at a known fixed exchange rate, so the risks can be preventable

Future foreign currency exchange is the purchase or sale of foreign currency amount at the exchange rate determined by the two parties, the transfer of foreign currency shall be carried out in the future through the foreign exchange transaction offices

The futures contracts may be used for the purposes of hedging risk prevention and speculation Individuals, organizations, banks send purchase orders and sale orders of a specific amount of foreign currency to the brokers or the member of main transaction offices

On a transaction office, the purchase orders are matched against the sell orders

For future contracts, foreign currency amount is specified It is imperative in future transactions that both buyer and seller of the contract must be the member of the market and have a margin account and pay the transaction fees

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Option contract is a financial instrument that allows the buyer to choose rights (but not imperative) to purchase, sell a foreign currency at a rate agreed in advance in a given period There are two types of option contracts:

- European-style option: only allow the transaction at the time of maturity of the contract

- American-style option: Allow to make transactions at any time before maturity

Buyers of option shall pay a fee called the option fee and pay upon signing the contract The longer duration of option contract is, the greater influence of difference in interest rates is.

Survey results

Currently, VIB also used the derivative contracts to hedge against the exchange rate risk However, only a derivative contract used is the forward contract The use of 1 of the 4 types of contracts does not promote efficiency and enhance the cooperation between banks and customers who are mainly enterprise

To be able to suggest some solutions to enhance efficiency of using derivative contract at VIB, I have conducted a survey on current using derivative contracts of VIB clients to hedge against the exchange rate

- Survey Objective: Survey on the current use of derivative contracts of enterprises to prevent exchange rate risk

- Execution time: From August 1st, 2016 to September 15th, 2016

- Subjects: Enterprise customers of VIB

- Method: Using survey sheet for direct interview

The author delivered 100 sheets, recovered 95 sheets By interviewing, collecting, summarizing, analyzing, my team has given the survey results

The results have showed that 100% of responses confirms that they mainly use foreign currency to import , a few enterprises use foreign currency to pay foreign experts salaries, 5 enterprises, equivalent to 5.3% aim to loan repayment and few firms-only 2.1%, equivalent to

2 enterprises use foreign currencies for investment

Table 3: Number of enterprises using each currency for different purposes

100% of responded enterprises use US dollar, very few use EUR and JPY, only 4 enterprises corresponding to 4.2% use EUR and 2.1% use JPY for importing For other transaction purpose only US dollar (not EUR, JPY) are used Thus, there is not many kind of foreign currency used in business activities

Table 4: Degree of enterprise’s concern about exchange rate risk

In general, 100% of enterprises are interested in exchange rates risk, 36.84% of themare really worried before the change of exchange rates , 63.16% of remaining enterprises do not clearly shows their perspective on this issue They concern with exchange rate risks, but have no specific measures to prevent In fact, they accept this risk

Table 5: Enterprise’ situation of using derivative contractse

Percentage Not know and not use 88 92.6

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Regarding awareness of enterprises on the use of derivative contracts to prevent the exchange rate risk, 100% of businesses do not use derivative contracts yet, only 7.4% of enterprises have heard of these contracts, but mainly forward contracts, 92.6% of businesses have never heard of the derivative contracts Thus the knowledge of the contracts of all the enterprises is very limited, partly because that Vietnamese bank currently do not widely provide derivative products

Fig 2: Enterprise’s demand for using derivative contracts and for training in future

Concerning demand for using as well as for training, according to the survey, the number of enterprises wishing to use are 60% higher than the number of those very wishing, the number of enterprises wishing to be trained are 68.4% higher than those very wishing The data show that the enterprises awareness of benefits from using the derivative contracts in preventing the exchange rate risks is still limited Hence, demands forusing and training of the enterprises are at certain levels However, in the future, demand for using and training will become urgent

Table 6: Applicability of derivative contracts in the future

Demand for contract use in the future 6.3% 27.4%

Training needs in the future

Normally Nedd Very need Normally Need Very need

Fig 3: Applicability of derivative contracts in the future

Regarding the applicability of the contract in Vietnam in the upcoming time, only 25.3% of enterprises agrees that this is positive, 11.6% of them said that it cannot be done because until now most of them are not aware of the contracts, along with the difficultylack of understanding in forecasting exchange rate Besides, some enterprises still hesitate and tend to accept to take risks rather than take measures for risk management

After the surveying and analyzing results, we noticed that some limitations exist in the enterprises, there are also indirect causes affecting the exchange rate risk management of the bank Thus, for better exchange rate risk management, the bank should cooperate with enterprises customer of the bank.

SWOT matrix

SWOT analysis is carried out to specify internal foctors such as Strengths (S), Weekness (W) of VIB and external factors such as Opportunities (O), Threats (T), when the Bank deploy instruments to mitigate exchange rate risks

-Vietnam is a developing country in the world with an annual economic growth at around 6- 7% Especially the growth rate of the banking sector is also high: 20%/ year

- When Vietnam joined the WTO, import and export opportunities increase, making the increasing demand on international payment, the demand for loans of enterprises domestically and internationally is increasing

-Trends of globalization and elimination of trade barriers increasingly bring a lot of business opportunities across the borders

Applicability of contracts in the future Atương lai

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- Since Vietnam joined the WTO, "landing" of foreign banks in Vietnam will create fierce competition in the race between banks aiming to increase share of Finance market in Vietnam The foreign banks with large capital, experienced and qualified employees, specific and clear business strategy for a long time will make the domestic banks to face difficulties in competing "piece of cake of the domestic market share"

- Accompanied by competition in the high quality labor market of the foreign banks, it will cause brain drain

- Strong capital: After 20 years of operation, VIB has got the total assets of nearly 86 trillion VND, charter capital of 4,845 billion VND, equity of nearly 9,000 billion VND

Currently, electronic payment service at VIB is supported by the system of state bank networks throughout the country with 80 branches and over 200 transaction offices, two underlying companies and one non-business unit; reached to the international market with 1 subsidiary and 2 representative offices abroad VIB has agency with nearly 2,000 banks and financial institutions in over 100 countries and territories around the world

- Strong brand, reputation and high credibility

VIB is the bank with good reputation in the financial market of Vietnam VIB bank is reputable bank with high credibility, service quality highly appreciated by the foreign financial institutions and with many prestigious awards voted by many prestigious organizations such as: In typical bank "Bank of the Year", Top 5 bond trading on Hanoi Stock Exchange, Top 10 banks to implement Basel II, the bank had capital adequacy ratio (CAR) Highest Basel II implementation

- Diversified product is shown by: VIB card products are very diversified to meet all the different needs of customers A wide network of Points of Sale always has incentive programs for customers using the VIB card

Banking services on mobile phones of VIB-Mobile B@nking have compatibility with most mobile phones, from smart phones using operating systems of iOS (iPhone), Android, BlackBerrys OS to ordinary phones with Java support and an Internet connection via GPRS, 3G, or WiFi With VIB-Mobile B@nking, customers can easily perform transactions: Prepaid phone recharge (Topup) for mobile subscribers of Mobifone, Vinaphone and Viettel; transfer

21 in VIB system; billing for postpaid mobile phone services of Viettel, Mobifone, HomePhone and ADSL of Viettel Telecom, phone services Saigon South Telephone Center (SST)

- Information Technology Resources of the Bank lacks both manpower and machinery

VIB ATMs have caused annoyance to the customers of transmission line failure, out of money This situation on the peak days such as holidays, New Year's Day, Saturday, Sunday is very common the ATMs of VIB

- There is shortage of human resources with knowledge of international financial markets and derivative contracts This is not only the weakness of VIB in particular but also the weakness of the banking system of Vietnam (including state-owned banks and state banks)

- The bank has not used diversified methods of risk prevention, namely the use of all types of derivative contracts in order to improve the prevention of exchange rate risks

O1 The market has great potential

O3.The demand for payment, lending, of customers is increasing then demand for limitation of exchange rate risk increase

T1.Highly competitive environment due to the many strong opponents and potential rivals

W2 Lack of human resources (sector derivative contracts) W3 Not use a variety of derivative contracts .

Suggested solutions

4.5.1 Improving the use of derivative contracts:

Derivative transactions are used since the 80s of the twentieth century and are increasingly popular around the world, especially the developed economies They are considered a useful tool for the purposes of hedging risks as well as speculative activities of the agents on the

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22 foreign exchange market, including commercial banks The reason why it is the preferred by investor is the cost when using options in protection strategies in particular and risk management in general In options trading, the investors have accepted to share their risks and profits for its other investors Importance of derivative transactions is undeniable Therefore, the bank needs to quickly apply additional contracts for preventing exchange rate risk used to serve the needs of customers, both preventing exchange rate risks and earning a certain profit For this purpose, first of all, the bank executives must always create favorable conditions for foreign exchange trading staff to attend training courses on derivative contracts, enhance understanding and learning the practical experiences relating to these contracts

Established consulting team responsible for derivative transactions of currency trading room for customers to better understand option contracts, forward contracts…support the import and export enterprises can choose the exchange operations consistent with their business situation, to resolve the conflict between profit and risk

Up to 4 team in charge of counseling support derivative transactions:

4 groups will support the import and export enterprises can choose exchange operations consistent with their business situation, solve the conflict between profit and risk

- Open professional training classes annually, common law and special activities implemented derivative contracts

Most businesses use the US dollar as the main payment currency Due to the high demand for USD but too limited reserves, sometimes the bank cannot respond immediately to customers In addition to getting profits thanks to the US dollar, banks face the risk of US dollar fluctuation Therefore, the bank should exploit profits from other currencies such as the EUR, JPY, GBP, risk will not focus on the US dollar only, but share with other contracts, the bank will raise profit due to price differences and limit exchange rate risk Foreign exchange trading department should have advisory staff, who guide customers using other currencies, explain to them the basic benefits they will gain, such as when using the EUR, JPY, They will save time and cost, when customers wanting to convert to US dollars will be also easier, not dependent on the supply of US dollars

With the diversification of foreign currency, VIB should set limits on foreign currency trading and limits for each currency

- The daily trading limit: The bank raises the maximum of daily trading limit for each employee for each currency

- Loss limit: The Bank also set an acceptable loss limit, if surpassed that may affect the business operations of the bank

- Risk limit: This limit should be set for departments, given the expected maximum loss which departments are not allow to exceed this expected loss

Hence diversification of foreign currencies within the framework should not be too rigid, be flexible, fit actually incurred

Table 8: Suggested Some Foreign Currencies Can Diversify

With the euro is widely used and trusted currency, it is very common in the foreign exchange market, after the US dollar, plus its liquidity in the currency pair, the EUR is trade popularized by the investors

Japan had a 0% interest rate policy in the 1990s and 2000s, traders borrow yen at a cost equal to 0 and use it to invest in higher-yielding currencies in the world, taken the difference in interest rates in the process

The pound, also known as the British pound, the currency traded 4th in the forex market It also acts like a reserve currency because it has relative value when compared to other global currencies Although the United Kingdom is a full member of the European Union, it is still not chosen the euro as its official currency for so many reasons, is the pride and history of the pound maintain control over national interest

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The last stand of the list is CAD Canadian Dollar is probably first commodity currencies in the world, which means it will move along with the commodity markets, especially crude oil, precious metals and minerals Canada is a major exporter of this commodity, so CAD is very volatile copper prices of basic commodities, especially crude oil CAD traders usually trade contracts based on the volatility of the commodity as well as to ensure the holding of the basic contract Moreover, the geography is placed close to the largest consumer market in the world - the US, the Canadian economy followed by co-CAD has a high correlation with US economic strength as well as the volatility of the dollar

CONCLUSIONS AND RECOMMENDATIONS

Measures to Overcome the Problems

After my internship at Vietnam International Commercial Joint Stock Bank, with my theoretical knowledge that I learnt from the AMI course and my ability, I think I did something useful for the company I collected some basic data about Factors affecting the foreign exchange operations of the VIB I did market research and SWOT analysis which help me to predict not only the opportunities for the company in competition with other companies in this tough industry but also the threats that the company might face so it can prepare strategies for its long term business

- To Fulfill the advanced model of FX risk exposure management as a directive independent and focal model Focal model means that all FX risks& exposures to be centralized and processed at VIB Head quarter, not scattered and decentralized settlement at any business sites ( transactions sites and branches) network within the whole bank Centralized processing due to the establishment of the Department for market risk & control management The Department works and operates independently separated from trading counters and trading desks

- The functions of front offices, middle offices and back offices must be a clear cut and work and operate independently Risk tools as VaR, stress test and back test must be introduced and apply to to the portfolio management on a gradual

- Due to the centralized processing at Head Office The staff and emloyees in the branch network are not equiped and trained enough for updated regulations on FX exposure management They are easier to violate the law and regulations Training course and programs for Branch staff and employees are proposed

- There are many financial instruments and techniques used for hedging FX risk& exposure The selection of the most effective tool is proposed

- Selection of a best methodology for market risks and Exposures is proposed to avoid the confusions in measuring and hedging market risks and Exposures The daily work done by The market risk department

- Human resources – key personnel in the market risk department including FX risk exposure that are young not matured enough and unexpereienced They are required to be enhanced and upgraded through training and practices

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Based on business strategy in 2015, in which VIB set primary priority in risk and exposure management As the first participant in Basel II capital charge requirements, VIB should pay a lot attention to and human resource development and infrastructural bases for risk management, in which there is FX exposure management.

Recommendations for the company

The exchange rate increased that make benefit for exporters and limit the trade deficit, and also work to reduce inflationary pressures However, in the short term will cause some difficulties for businesses such as investment decisions will take into account the exchange rate risk, particularly enterprises engaged in import and export Therefore, to minimize these risks, banks and enterprises need to coordinate the implementation of the derivative instruments It should be noted that the exchange rate fluctuations are often larger fluctuations in interest rates, so the reduction of cost of exchange risk prevention in the short term is extremely important

In the long term, banks need to focus on the real economic impact of currency changes and it is necessary to build a strategy to manage foreign exchange risk, along with strategies such as marketing, appropriate financial management to deal with the economic impact of exchange rate fluctuations Because, the exchange rate fluctuations leads to the change of the currency market and affect the competitiveness of the bank Banks can prevent the risk of foreign currency based on income and expenditure are planned in advance, but on the contrary, competition risks, - the problem stems from the competition with the banks relying on other currency that is long, difficult to quantify and can not be resolved merely through simple prevention techniques

 Raising charter capital, increasing the bank's equity capital in order to increase business and limit the ability of international payments Since then the brand of banks is increased, enabling for development of banks The increase of the charter capital of the bank has a number of advantages such as eliminating the weak banks, the potential risk would be a threat to the entire banking system

 In foreign exchange trading activities, the risk factor is always standing so banks need have the risk funds from profit gained to offset and prevent risks

REFERENCES http://gregmankiw.blogspot.com/2006/05/summer-reading-list.html http://www.vietnameconomy.org/banking-finance/ http://economictimes.indiatimes.com/definition/risk-management http://economictimes.indiatimes.com/industry/banking/finance

Thư viện ĐH Thăng Long

Table 2: The MBA course and their usefulness knowledge applied in the internship 11

Table3: Number of enterprises using each currency for different purposes 17

Table 4: Degree of enterprise’s concern about exchange rate risk 17

Table 5: Enterprise’ situation of using derivative contractse 17

Table 6: Applicability of derivative contracts in the future 18

Table 8: Suggested Some Foreign Currencies Can Diversify 23