Current Status of Foreign Exchange Trading Activities at NHtmcp Ctvn

This is a strategy that allows the option buyer to secure a desired floor price, while still having the opportunity to profit when the price increases (with no upper limit), which means eliminating the disadvantage of the futures contract when exchange rate fluctuations appear in favor of the exporter.

As is well known, if an exporter enters into a forward sale contract, he does not have to pay any premium to insure against adverse changes in the exchange rate, and at the same time gives up any favorable price increases. By entering into a forward contract, the buyer will participate in favorable changes at a certain rate, while still ensuring a floor price even though this exchange rate is slightly lower than the forward rate.

To illustrate this strategy, let's take an example. Suppose on December 30, 2010, a Japanese export company receives a notice that 1 month later (January 30, 2011), the company will receive 2 million USD from a US customer. When receiving USD, the company will have to immediately convert that USD amount into JPY, to avoid the risk of the USD/JPY exchange rate falling, that is, the USD depreciating against the JPY, which will reduce the income from USD. Therefore, to hedge the risk, and at the same time want to participate in making a profit if the company's concern is wrong when the USD/JPY exchange rate increases. The company decides to use the option sharing insurance strategy (a futures participation contract). Knowing that in the market:

- Spot rate USD/JPY = 103.00

- 1-month forward rate USD/JPY = 102.50

The buyer agrees to enter into a forward contract with a floor rate of 102.00, expiring on January 30, 2011, which is similar to buying an out-of-the-money USD put option , with a strike rate of 102.00. The forward contract entitles the exporting company to 75% of the contract value if the exchange rate rises to its advantage.

One month later (January 30, 2011), if the spot rate now falls below 102.00, the exporter is still guaranteed to sell at the USD/JPY rate.

= 102.00, which means the exporter will receive a total of JPY 204,000,000 = USD2,000,000 x 102.00. Conversely, if USD/JPY increases to 104.00, the company will participate in that favorable change at a rate of 75% of the favorable difference,

i.e. = 75% x (104.00 – 102.00) = 1.5. Therefore, the actual exchange rate at which the exporting company sells is USD/JPY = 102.00 + 1.5 = 103.50. The exporting company will make a profit of = USD2,000,000 x (103.50 - 102.00) = JPY 3,000,000.

The analytical issue for this type of contract is to determine the participation rate that can compensate for the premium that the company does not have to pay for buying the option. This is one of the zero cost strategies.

+ Cylinder Option : Use both Buy call option and Sell put option at the same time .

On December 29, 2010, a Vietnamese textile exporter will receive EUR

5,000,000 in 3 months (March 29, 2011). There is some information about exchange rates in the foreign exchange market as follows:

EUR/USD Spot Rate

=	1,3600
F: 3-month forward rate EUR/USD	=	1,3700
E 1 : Strike rate EUR/USD	=	1,3550
E 2 : EUR/USD strike rate	=	1,3850
EUR/USD put option premium with strike rate 1.3550			=	0.02
EUR/USD call option premium with strike rate 1.3850			=	0.02
S* : Spot rate at maturity

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To protect the above position from the risk of a decrease in the EUR/USD exchange rate, i.e. the exporter is concerned that the EUR will decrease in value against the USD, making the value of the EUR 5 million received after 3 months less than it is now. Or simply the exporter wants to fix from today the amount of USD (when converted from EUR) to be received after 3 months equal to the current value. The exporter can use one of the following two hedging strategies:

- Using options: Simultaneously buy put options and sell call options , the purpose of this strategy is that the exchange rate will only fluctuate within a certain range (E 1 , E 2 ), in other words, ensure that the floor rate is relatively lower than the strike rate.

current price, but allows the exporter to make a profit when the exchange rate increases, while turning the insurance cost to Zero Cost. Specifically as follows:

On December 29, 2004, the Exporter purchased a put option with a strike rate of EUR/USD = 1.3550, costing $0.02/EUR, with the intention of ensuring that the exchange rate does not fall below 1.3550.

At the same time, the exporter sells a call option with a strike rate of EUR/USD = 1.3850. When selling the option, the exporter will receive a premium of 0.02 USD/1EUR, the purpose is to make the insurance cost no longer too expensive, in fact the cost is zero.

On March 29, 2005, that is, 3 months later, the possible scenarios of the EUR/USD exchange rate were analyzed using the aggregate state of the cylinder option strategy in the figure below.

Interest

Positive state

Sell Call Option Cylindrical Option Status

1,335

Hole

1,355

1,370

Option fee 1.385

1,405

EUR/$ spot rate at maturity

Buy put option

Figure 1.7: Cylindrical option strategy

- Analysis for selling call options:

+ If the EUR/USD spot rate only increases to near 1.385 (F < S* < E 2 ), the call option will no longer be valid. Because at this time the buyer of the call option will not exercise the right to buy EUR anymore because the spot rate on the market is lower than the strike rate. Thus, when receiving the amount of 5 million EUR from the European partner

Europe due to textile export activities from 3 months ago. The exporter will sell on the market at the exchange rate S* assuming EUR/USD = 1.380 and receive the amount of USD

6,900,000. The exporter has made a profit on the option contract with the amount = EUR 5,000,000 x (1,380 - 1,370) = USD 50,000.

+ If the EUR/USD spot rate increases above 1.385 (S* > E 2 ), the call option will be valid. This means that the buyer of the call option will exercise the right to buy EUR at the strike rate of 1.385. Thus, the exporter will lose on the option contract, but in return, the exporter will gain on the EUR amount received from the export activity. In this case, the exporter will always sell EUR at the rate of 1.385. Because when receiving the amount of 5 million EUR from the partner, the exporter will sell that amount to the customer who buys the call option at the strike rate and make a profit with the amount = EUR 5,000,000 x (1.385 - 1.370) = USD 75,000.

- Analysis for buying put options:

+ If the EUR/USD spot rate falls below 1.355 (S* < E 1 ), the call option will be invalid, while the put option is valid. At this time, the exporter will exercise the right to sell EUR at the strike rate of 1.355. That means when receiving the amount of 5 million EUR, the Exporter will sell at the EUR/USD put rate = 1.355 and receive USD 6,775,000, so the exporter has lost the amount of EUR 5,000,000 x (1.355 - 1.370) = USD 75,000.

+ If the EUR/$ spot rate only drops to near 1.355 (E 1 < S* < F), both the call and put options will be invalid. Because at this time the exporter will not exercise the EUR put option and when receiving the amount of 5 million EUR, the exporter will sell at the spot rate on the market, for example S* = EUR/USD = 1,360 and receive USD 6,800,000, so the loss will be reduced to EUR 5,000,000 x (1,360 - 1,370) = USD 50,000.

By using this strategy the exporter has a chance to make a profit and also has to accept a certain amount of risk. However, the exporter has allowed the exchange rate to fluctuate within an acceptable range. In the modern world, no

No strategy is perfect, no profit-making goal is without risk.

In the foreign exchange market, exchange rates are always fluctuating, so there is always risk. When using derivative instruments, import-export enterprises will insure their cash flow, although they only have to pay a small initial cost. For commercial banks, when applying derivative instruments in their foreign exchange business activities, they have provided exchange rate risk insurance services to enterprises, thereby enhancing their reputation as well as increasing their own income.

CHAPTER II

CURRENT STATUS OF IMPLEMENTING OPTIONS IN FOREIGN CURRENCY TRADING ACTIVITIES OF VIETNAM JOINT STOCK COMMERCIAL BANK FOR INDUSTRY AND TRADE

2.1 GENERAL INTRODUCTION OF CTVN COMMERCIAL JOINT STOCK BANK

Vietnam Joint Stock Commercial Bank for Industry and Trade is a large commercial bank in the Vietnamese banking system, starting operations in July 1988 under Decree 53/HDBT dated March 26, 1988 and Decision No. 402/CT dated November 14, 1990 of the Chairman of the Council of Ministers (now the Prime Minister), and was re-established under the model of a State Corporation by the Governor of the State Bank under Decision No. 285/QD-NH5 dated September 21, 1996. Vietnam Joint Stock Commercial Bank for Industry and Trade is a specially ranked enterprise under Decision No. 90/TTg dated March 7, 1994 of the Prime Minister. However, on December 25, 2008, Vietnam Joint Stock Commercial Bank for Industry and Trade successfully conducted its initial public offering. As of December 31, 2010:

- Charter capital of NHTMCPVN is: 15,173 billion VND.

- Assets of NHTMCPCTVN are: 367,712 billion VND.

- Functions of the Joint Stock Commercial Bank for Foreign Trade of Vietnam: performing monetary, credit and banking services for domestic and foreign economic sectors.

- Traditional customers of NHTMCPCTVN are individuals, businesses, and corporations operating mainly in the fields of industry, construction, transportation, post and telecommunications, trade, services, and tourism.

- NHTMCPCTVN is managed by the Board of Directors and operated by the General Director.

- CPVTVN has 17,243 staff, 157 transaction offices and branches; nearly 1,000 transaction offices/savings funds; 02 domestic representative offices; 04 subsidiaries

and has correspondent relationships with 850 banks and financial institutions worldwide,

- NHTMCPCTVN is one of the founding members of the following credit financial institutions:

+ INDOVINA BANK - the first joint venture bank in Vietnam.

+ Asia Insurance Joint Venture Company - NHCT.

+ VILC - Vietnam International Leasing Joint Venture Company.

- CPTCVN Commercial Joint Stock Bank is an official member of the Asian Bankers Association; a member of the VISA and MASTER card payment and issuance association and a member of the global interbank telecommunications network SWIFT, the Vietnam Banks Association and the Vietnam Chamber of Commerce and Industry.

- NHTMCPCTVN has 6 independent accounting companies: Financial Leasing Company, Industrial and Commercial Securities Company, Debt Management and Asset Exploitation Company, Insurance Company Limited, Fund Management Company Limited, Gold and Gemstone Company Limited and 3 public service units: Information Technology Center, Card Center, Training and Development School.

- Some basic operating results of NHTMCPCTVN achieved as of December 31, 2010 are as follows:

Capital mobilization: reached 349,339 billion VND, an increase of 18,332 billion VND compared to 2009, an increase rate of 115%.

Lending and investment: Total outstanding loans to the economy reached: 295,111 billion VND, an increase of 93,052 billion compared to 2009, a growth rate of 46%.

2.2 CURRENT STATUS OF FOREIGN CURRENCY BUSINESS ACTIVITIES AT CTVN JOINT STOCK COMMERCIAL BANK

Decision No. 28/NH-TT dated March 16, 1991 of the Governor of the State Bank of Vietnam allows the Joint Stock Commercial Bank for Industry and Trade of Vietnam to conduct a number of foreign banking activities, including a number of specific operations, including foreign exchange operations.

Since being allowed to operate foreign banking business in general and foreign trade business in particular, the activities of the Vietnam Joint Stock Commercial Bank for Industry and Trade have truly entered a new stage of development.

In the early years of establishment, foreign exchange activities were only carried out sporadically in a few large branches with a very limited number, simple operations, only performing spot transactions, with the main foreign currency being USD, annual sales turnover was only about a few hundred million, the main purpose was to serve the payment needs of import customers, revenue from foreign exchange was very modest, only approximately 1% of total revenue.

Especially since 1995, with the establishment of the Foreign Trade Department (KDNT) at the Headquarters of the Joint Stock Commercial Bank for Foreign Trade of Vietnam, the foreign trade activities of the Joint Stock Commercial Bank for Foreign Trade of Vietnam have made new progress in both scale and quality and have gradually stabilized. The activities are not only limited to the domestic market with one foreign currency, USD, but have expanded the scope of activities to foreign markets, diversifying operations and foreign currencies.

According to the current organizational model, the functions, tasks and scope of business operations are divided as follows:

Foreign Trade Department - At the Head Office of the Vietnam Joint Stock Commercial Bank for Industry and Trade.

* Functions of the Sales Department

- Under the direct management of the Board of Directors of the State Bank of Vietnam, performing the function of managing foreign exchange trading activities of the entire State Bank of Vietnam system.

- Is the sole focal point of the Vietnam Joint Stock Commercial Bank for Industry and Trade authorized to conduct foreign exchange transactions in the domestic interbank foreign exchange market and in the international foreign exchange market.

- Has the function of directing and inspecting the business operations of branches in the system of the Vietnam Joint Stock Commercial Bank for Industry and Trade.

* Main tasks of the Sales Department

- Carry out all foreign exchange trading operations in the domestic and international markets, including: spot, forward and swap operations, contributing to

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