report vietnams derivatives market course financial institutions and markets

VIETNAM NATIONAL UNIVERSITY — HO CHI MINH CITY INTERNATIONAL UNIVERSITY

REPORT TOPIC:

VIETNAM’S DERIVATIVES MARKET

Course: Financial Institutions and Markets

Lecturer: Vo Thi Quy

Group: 3

Group’s members: Diéu Trong Khang - BAFNIU20013 Nguyễn Lan Hoàng My - BAENIU20075 Ngô Dĩnh Thăng - BAFNIU20105 Nguyễn Chính Đông - BAENIU18254

TABLE OF CONTENTS

I, Introduction to Derivatives 1 Definition

*Note: Derivative securities in this paper solely involves financial derivatives

1 Definition

A derivative is a security whose value is based on the value of one or more underlying assets An underlying asset can take many forms, such as stocks, bonds, commodities, currency, interest rates, or market indexes Derivative securities generally involve a contract

between two parties to exchange a standard quantity of an asset at a predetermined price and at a specified date in the future

Derivatives involve the buying and selling, or transference of risk As the value of the underlying assets changes, the value of the derivatives changes Under normal

circumstances, trading in derivatives should not adversely affect the economic system

because it allows individuals who want to bear the risk to take more risk while allowing individuals who want to avoid risk to transfer that risk elsewhere However, derivative

traders can experience large losses if the price of the underlying asset moves against them

Some individuals and institutions enter a derivative contract in order to earn a leveraged

rate of return In this case, they use derivatives to acquire risk in order to speculate on the value of the underlying assets

b Hedging

Derivatives are sometimes used to reduce the risk associated with positions or commitments in the line of business In other words, derivatives are used to protect the owners against the risk of an adverse move in an asset

Hedging is a way to reduce risk and limit loss Meanwhile, speculation involves a significant

amount of risk for the investors to achieve fast profits

II Derivatives in Vietnam

1 Types of Derivatives

4 main types of Derivatives in Vietnam: Forward, Futures, Covered Warrants and Swaps

a Forward

A forward is a contract to buy or sell a certain quantity or unit of the underlying asset in the

future, at a specified price at the time of entering into the contract There is no need to standardize the terms, value, and volume of the underlying asset for a forward contract An

investor can close a position by taking a reverse position on the same contract but only when

the forward contract expires Forward contract doesn’t require the investors to make a

deposit to ensure mandatory payment obligations

b Futures

A futures contract is a standardized contract between a seller and a buyer for the transaction of an underlying asset at a specified time in the future for a predetermined price A futures contract has standardized terms and is traded on an exchange, where prices are settled daily until the end of the contract An investor can close a position anytime duing the contract, which will help the investors to be flexible in using their capital Futures contract requires the investors to make a deposit to ensure mandatory payment obligations The contract's price of a future contract is adjusted each day as the price of the asset underlying the futures contract changes and as the contract approaches expiration As a result, marking futures contracts to market ensures that both parties to the futures contract maintain sufficient funds in their account to guarantee the eventual payoff when the contract matures

c Covered Warrants (CW)

A covered warrant is a type of warrant where the issuer is a financial institution rather than an individual company and offers the right, but not the obligation, to buy or sell an asset at a

specified price on or before a specified date The trading price of each warrant is usually

low, so when participating, investors only have to spend a small amount of money CW is listed on the Stock Exchange as securities, investors can use the securities trading account to buy/sell warrants Trading time, orders, order matching methods, pricing principles,

payment operations are similar to those of stocks and standardized by the Stock Exchange When participating in CW trading, investors do not have to deposit any money, can even

call or place warrants To protect investors, the Securities and Exchange Commission has specific regulations on conditions for stocks to become underlying securities, as well as conditions for securities companies to be allowed to issue CWs

d Swaps

Swap is an agreement between two parties to exchange a series of cash flows for a specific

period of time at a specified interval Like forward, futures, and option contracts, swaps allow firms to better manage their interest rate, foreign exchange, and credit risks

A plain vanilla interest rate swap is an exchange of fixed-interest payments for floating- interest payments by two counterparties In this type of exchange, no principal is exchanged The swap buyer makes the fixed-rate payments in an interest rate swap transaction while

the swap seller makes the floating-rate payments in an interest rate swap transaction

Another type of Swaps is a currency swap - a swap used to hedge against exchange rate risk from mismatched currencies on assets and liabilities It is usually associated with borrowing

money when because a company wants to obtain foreign currency loans at a better interest

rate than borrowing directly in a foreign market The exchanges can be at a fixed or a variable rate of interest as negotiated in the contract, but it is required that the exchanges occur at a known currency exchange rate

Swaps are not standardized contracts because swap transactions are generally

heterogeneous in terms of maturities, indexes used to determine payments, and timing of payments Unlike futures and options markets, because commercial banks were the major

swap dealers

2 Derivatives in Centralized and Decentralized markets Since its inception in 2017, Vietnam's stock market has 7 securities companies that are

derivatives trading members of HNX and clearing members of VSD Up to now, the number of securities companies performing derivatives brokerage operations has increased to 23 companies The top brokerage market shares of securities companies that dominate the derivatives market from 2017 to 2021 are summarized in the charts below

On August 10, 2017, the VN30 index futures contract derivative product was formally

launched in Vietnam's derivatives market With this event, Vietnam has become the fifth 4

country in the ASEAN region to have a derivative stock market, joining Singapore, Malaysia, Indonesia, and Thailand, and the 42nd country in the world to have a high-level financial market

A 5-year government bond futures contract was introduced to the derivatives market on July 4, 2019 On June 28, 2021, a third product, a 10-year government bond futures contract,

was added, bringing the total number of derivative products listed to three; however, the

following two products are not accessible to individual investors

Besides the VN30 index futures contract and government bond futures contract, another derivatives product is also being traded in the centralized market, which is the Covered Warrant (CW) A covered warrant is a type of warrant where the issuer is a financial institution rather than an individual company (for example, in VN, we have securities companies issuing such as VNDIRECT, SSI, VPS, MBS, HSC, etc.) and offers the right, but

not the obligation, to buy or sell an asset at a specified price on or before a specified date In 2019, CWs began trading Until 2021, 134 CWs are exchanged in the market, up from only 10

CWs when the market first opened As of August 2020, the total volume traded was 990

million CWs, worth VND 1.48 trillion This product offered investors an opportunity to invest in potential stocks with high leverage

Example for CW trading in Vietnam:

You buy 1,000 call warrants to buy the VNM stock with the following information:

Conversation ratio 5:1 Exercise price 150,000 VND

Current price of VNM (underlying)145,000 VND

Warrant price 1,000 VND

The total money you spend on this deal = 1,000 CW * 1,000 VND = 1,000,000 VND - After three months:

Assuming that the market price of VNM is 155,000 VND, the market warrant price is 1,500

VND You can sell your warrants on the Stock Exchange to take profit

Your profit = 1,000 CW x (1,500 VND - 1,000 VND) = 500,000 VND - On expiry date:

Assuming that you hold the warrant till the expiry date and the calculated and announced settlement price of VNM is 165,000 VND

The issuer shall pay you: 1,000/5 * (165,000 VND — 150,000 VND) = 3,000,000 VND Your profit = 3,000,000 VND - 1,000,000 VND (the initial cost for CW) = 2,000,000

Nevertheless, if the calculated and announced settlement price of VNM is lower than or equal to 150,000 VND (exercise price) -> The differential of the settlement price and the exercise price is lower or equal to 0 VND Your warrants will not be exercised and you will

lose your money invested in the warrants (1,000,000 VND) Participants: Personal investors, institutional investors

Example for Future contract VN30 index:

An investor enters a long position and buys a futures contract on the VN30 index with the price of 1,000 points According to the multiplier of 100,000 VND/point, the contract value is up to 100,000,000 VND However, investors only need to deposit 15%, which is 15 million VND, to be able to trade this contract

When the contract price increases from 1,000 points to 1,005 points, investors are profitable with a value of 500,000 VND, the margin value increases to 15.5 million VND

If trading in the underlying market, the percentage of profit compared to the initial deposit will only be: 500,000/100mil x 100% = 0.5%

Meanwhile, with the futures contract, the percentage of profit investors receive is up to: 500,000/15mil x 100% = 33.3%

Participants: Personal investors, institutional investors

Vietnam's derivatives market in the first four months of the year 2022

The Hanoi Stock Exchange (HNX) recently revealed that liquidity in the derivatives market surged by 56.68 percent in April 2022 compared to March

In particular, transactions on the futures market grew significantly in April 2022 compared

to the previous month The entire futures contract trading volume for the month was 4,053,391 contracts, with a nominal value of 591 trillion dongs The average monthly futures trading volume was 202,670 contracts/session, up 56.68 percent from the previous month, and the average trading value was VND 29.55 trillion, up 53.15 percent from the previous month

The VN30 index declined 5.53 percent from the previous month, ending the month at

1,417.31 points Meanwhile, the VN30 futures contract product trade surged dramatically,

with the average trading volume reaching 202,601 contracts/session, a 56.63 percent raise, and the average transaction value in terms of contracts reaching 29,483 billion VND, a 52.77 percent increase over the previous month The trading volume on April 26, 2022, was the highest at 394,782 contracts This session also had the largest trade volume since the beginning of 2022

As of April 29, 2022, the open interest volume (OJ) was 30,315 contracts, a 5.16 percent

decrease from the previous month The greatest open interest volume in the month was

50,878 contracts on April 20, 2022, which is also the biggest open interest since the beginning

of the year thus far

Notably, international investor transactions dropped in April 2022 compared to March, accounting for 2.53 percent of the total market trading volume

In terms of government bond futures contracts, the average trading volume reached 68.2 contracts/session, with the average nominal trading value reaching VND 73.1 billion/session Domestic and international organizations carry out all transactions At the end of April 2022, the open interest volume is 0 contracts

The number of derivative trading accounts increased in comparison to the previous month

The number of derivative trading accounts reached 973,155 at the end of April 2022, a 4.7

percent raise over the previous month

250000 1,450.00 208562 205443 1,417.31 200000 ưng 165942 1,400.00 150000 3674 1,350.00

mm Tông khôi lượng giao dịch toàn thị trường (Hợp đông)

——OI toàn thị trường (Hợp đồng)

(01/1/2021 - 29/04/2022)

600 500

b Decentralized market (OTC)

In Vietnam, forwards and swaps have not been authorized to be traded in the Centralized market

FORWARDS

Forward contracts are used by businesses to reduce risk for their business in the future

because a forward contract will help a company to decide a fixed amount of income that a business can earn (or costs that the business must pay) in the future, regardless of market

fluctuations This is also useful when businesses use forward contracts to avoid fluctuations and the risk of currency devaluation

For Vietnam in particular, foreign exchange forward contracts are the most popular because

import-export companies, banks, and financial institutions all must hedge against the risk of

currency devaluation In transactions on foreign exchange forward contracts, the underlying asset here is the foreign currency and the forward price is the exchange rate between the two currencies The forward price is based on the agreement of two parties in a forward contract However, the agreed exchange rate must be within the limit of the current forward rate of the State bank at the time of signing the contract The difference when changing the exchange rate is the fee that enterprises must bear The Vietnamese financial market has not yet put forward contracts into official trading on the commodity market or the stock market because of the high risk that this type of contract offers

Liquidity of a forward contract is quite poor: It is difficult for the parties to transfer their positions in the contract before the maturity date For example, a company cannot sell the contract when it feels unprofitable or cannot cancel the contract when it is not profitable Other companies may see a disadvantage or no need for the underlying asset Moreover, there is a risk that one of the parties to the contract is unable to perform the

contract because there is no security intermediary (warrant (for example, the underlying

asset drops too sharply, causing too great a loss, the buyer may refuse to buy according to

contractual commitments) SWAPS

Commercial and investment banks with high credit ratings are swap market makers, providing both fixed and floating rate cash flows to their clients The counterparties in a

typical swap are a company, bank, or investor on one side (the customer is a bank) and an

investment or commercial bank on the other After a bank executes a swap, the bank typically covers the swap through an inter-dealer broker and withholds a fee for setting up

the initial swap If a swap is large, the dealer-to-dealer broker can arrange to sell it to several

counterparties, and the risk of the swap becomes more widespread This is how banks

offering regular swaps eliminate the risk, or interest rate risk, associated with them Initially,

interest rate swaps helped companies manage floating-rate debt by allowing them to pay a

fixed rate and receive floating-rate payments This way, companies can attempt to pay at the

common fixed rate and receive payments that match their floating rate debt (Some companies have done the opposite - pay floating and receive fixed - to match their assets or

liabilities.) However, because swaps reflect market expectations of future interest rates

Futures and swaps have also become an attractive instrument for other fixed-income market

participants, including speculators, investors, and banks For example, assume that PepsiCo

needs to raise $75 million to acquire a competitor In the US, they can borrow money at 3.5% interest, but outside the US, they can borrow at only 3.2% The benefit is that they will need to issue bonds in a foreign currency, which can fluctuate based on interest rates in the home

country PepsiCo may enter an interest rate swap for the life of the bond Under the terms of

the agreement, PepsiCo will pay the partner 3.2% interest for the life of the bond The company will then exchange $75 million at the agreed exchange rate when the bonds mature and avoid any risk of exchange rate fluctuations

Like most non-government fixed-income investments, interest rate swaps involve two main risks: interest rate risk and credit risk, known in the swap market as exposure risk work Because actual interest rate movements do not always match expectations, swaps involve

interest rate risk Simply put, the receiver (the counterparty receiving the fixed-rate payment stream) gains a profit if interest rates fall and a loss if interest rates rise In contrast, the payer (fixed payment partner) profits if the rate rises and loses if the rate falls

Swaps are also subject to counterparty credit risk: the possibility that the other party to the contract defaults on its liability This risk has been partially mitigated since the financial crisis, with a large portion of swap contacts now being settled through central counterparties (CCPs) However, the risk is still higher than investing in "risk-free" US Treasuries

Ill Derivatives market size in Vietnam

Over the past 4 years, the Vietnamese derivatives market has been put into operation and has shown remarkable growth in trading volume and average trading volume over the years

Table: Statistics of transactions

Period

Source: data collected from hnx.on

Average daily trading volume and newly opened accounts

400,000 200,000 )