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New Points in the Research Results of the Thesis


“RISK MANAGEMENT IN FOREIGN EXCHANGE TRADING AT BANKS

"HO CHI MINH CITY JOINT STOCK COMMERCIAL BANK" as a research topic for the PhD thesis.

5. OVERVIEW OF THE RESEARCH PROJECT

Through recent research, the author has found that research topics related to this topic have only been conducted by other authors at the Master's level in the country since 2008 and before, while abroad, no author has been found to have done a topic closely related to the topic the author is researching.

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The above topics were carried out before 2008, so the current situation is no longer suitable for the current situation. In addition, the solutions chapter of the Master's level topics is still heavily theoretical or difficult to apply to the practical operations of joint stock commercial banks in Ho Chi Minh City. Therefore, finding the most fundamental and feasible solution to enhance risk management in foreign exchange trading activities at commercial banks in Ho Chi Minh City is extremely necessary, in which there needs to be a model that can be applied in the practical operations of banks to help relevant units in the bank use it whenever there is a need to control and prevent foreign exchange risks.

6. RESEARCH OBJECTIVES OF THE TOPIC

New Points in the Research Results of the Thesis

The research topic aims to achieve the following four objectives:

Identifying the causes of problems in foreign exchange risk management of joint stock commercial banks in Ho Chi Minh City.

Proposing solutions to limit risks in foreign exchange trading at joint stock commercial banks in Ho Chi Minh City.

Proposing solutions to enhance risk management in foreign exchange trading of joint stock commercial banks in Ho Chi Minh City.

Recommend measures to support foreign exchange trading activities and risk management in foreign exchange trading.


4. OBJECTS AND SCOPE OF RESEARCH

The object and scope of the research is to study the current situation and solutions in enhancing risk management in foreign exchange trading of joint stock commercial banks in Ho Chi Minh City.

In addition, in foreign exchange trading activities, this thesis only limits the scope of research to strong foreign currencies (including: USD, EUR, GBP, AUD, JPY, CAD, CHF, SGD) and gold, because these are the two foreign currencies with the main and largest trading turnover at joint stock commercial banks in Ho Chi Minh City, accounting for over 90% of total trading turnover in foreign exchange trading.

The research period for this Thesis is from 2007 to 2012.

4. RESEARCH METHODS

As a scientific research project, in the process of implementing the topic, the author mainly uses methods of analysis, comparison, induction, deduction, and VaR method to conduct the research.

5. THESIS STRUCTURE

In addition to the introduction, conclusion, and list of references, the thesis is presented in three chapters:

CHAPTER 1: THEORETICAL BASIS OF RISK AND RISK MANAGEMENT IN FOREIGN EXCHANGE TRADING OF JOINT STOCK COMMERCIAL BANKS

CHAPTER 2: CURRENT STATE OF RISK MANAGEMENT IN FOREIGN EXCHANGE TRADING OF JOINT STOCK COMMERCIAL BANKS IN HO CHI MINH CITY

CHAPTER 3: SOLUTIONS TO ENHANCE RISK MANAGEMENT IN FOREIGN EXCHANGE TRADING OF JOINT STOCK COMMERCIAL BANKS IN HO CHI MINH CITY

7. NEW POINTS IN THE RESEARCH RESULTS OF THE THESIS

Clarify the factors affecting foreign exchange trading activities and causing risks in foreign exchange trading in current conditions.


Clarifying the shortcomings in risk management in foreign exchange trading of joint stock commercial banks in Ho Chi Minh City.

Proposing policies and solutions to enhance risk management in foreign exchange trading of joint stock commercial banks in Ho Chi Minh City.

CHAPTER 1


THEORETICAL BASIS OF RISK AND RISK MANAGEMENT IN FOREIGN EXCHANGE TRADING

OF JOINT STOCK COMMERCIAL BANKS


1.1. GENERAL THEORY OF FOREIGN EXCHANGE MARKET AND FOREIGN EXCHANGE TRADING

1.1.1. Foreign exchange relations in the economy

Foreign exchange relations in the economy do not arise independently, but are always influenced by many other market factors. There are many factors that indicate the interaction between foreign exchange transactions in the TTNH and other markets such as the commodity and bond markets. In addition, we can mention other markets and other policies such as the stock market, political, social, economic policies, ... also affect foreign exchange relations in the economy.

1.1.2. Foreign exchange market

1.1.2.1. Concept of foreign exchange market


According to the author, the foreign exchange market is where the conversion and trading of currencies of different countries take place; where gold transactions are carried out continuously and globally; where investment activities and international financial flows take place to satisfy the needs of economic entities; and at the same time, the transaction conditions are also determined.


1.1.2.2. Characteristics and functions of the foreign exchange market


1.1.2.4. Participants in the foreign exchange market

Central bank

Commercial banks

Brokers

Businesses

Other domestic and foreign individuals and organizations

Other financial institutions.

1.1.2.4. Development trends of the world foreign exchange market

1.1.3. Forex trading

1.1.3.1. Concept of foreign exchange

Foreign exchange includes monetary means used in international payments. For a country, foreign exchange includes:

Foreign currency

Valuable papers in foreign currency.

International standard gold:

National currency held by non-residents.

1.1.3.2. Concept of foreign exchange trading and basic issues in foreign exchange trading

According to the author, forex trading is the buying and selling of different currencies and gold in order to seek price differences or gain a fee.

There are three basic methods of generating profit in the banking business in the exchange market.

right:

Interest arising from creating foreign exchange positions.

Profit earned from exchange rate differences between different markets or within the same market.

Profit earned from the difference between buying and selling rates.


1.1.3.3. Types of foreign exchange transactions

Spot Forex Trading

Forward Forex Trading

Futures Trading

Swap Forex Trading

Forex Option Trading

1.2. FACTORS AFFECTING RISKS IN FOREIGN EXCHANGE TRADING OF COMMERCIAL BANKS

1.2.1. General factors affecting risks in foreign exchange trading

1.2.1.3. External factors

These are the main factors in the economic - political - social fields of countries around the world that affect the economy of a country in general and banking business activities in particular.

1.2.1.4. Internal factors

These are factors that affect a country's economy internally, which mainly include: inflation, trade deficit, dollarization of the economy, foreign currency status, exchange rate management mechanism and foreign exchange derivative contracts.

1.2.2. Specific factors affecting risks in foreign exchange trading

There are two main causes of risks in banking business, which are:

Banks buy and sell foreign currency or gold for customers and for themselves;

Banks invest in assets and raise capital in foreign currency or gold.

1.2. CRITERIA FOR MEASURING RISKS IN FOREIGN EXCHANGE TRADING OF COMMERCIAL BANKS


1.3.1. Quantitative criteria

1.3.1.1. VaR measurement method

One of the most popular methods of measuring risk in banking activities at commercial banks today is using the VaR model. The model will be analyzed in detail in section 1.4.2.3 of chapter 1 of this thesis.

1.3.1.2. Method of measuring foreign exchange status

This is also one of the popular quantitative measurement methods in the world today about the risk level of foreign exchange transactions that banks perform. The criteria of this formula are presented in detail in Section 1.2.2 of this Thesis.

Profit/loss on foreign exchange (i) = Net foreign exchange position (i) x

Exchange rate fluctuations of foreign currency (i) or gold price

1.3.2. Qualitative criteria

These indicators include: the level of use of derivative instruments (section 1.4.2.3), the use of exchange rate prediction techniques, limits (section 1.4.2.3), the domestic and foreign economic - political - social situation (section 1.2.1), policies of the Government and competent authorities (section 1.2.1), etc.

1.4. RISK MANAGEMENT IN FOREIGN EXCHANGE TRADING OF COMMERCIAL BANKS

1.4.1. Risks in foreign exchange trading of commercial banks

According to the author, foreign exchange risk is the risk arising from fluctuations in foreign exchange rates and gold prices that adversely affect future expected values. There are two main causes of foreign exchange rate and gold price risks: (1) banks trade foreign currencies and gold to serve their customers and their own banks; (2) banks invest in assets and mobilize capital in foreign currencies. Both of these causes create a trend of net foreign exchange position (long or short) in foreign exchange trading and in the structure of foreign currency assets. The more volatile the foreign exchange rate and gold price are, the greater the foreign exchange risk will be.


1.4.2. Risk management in foreign exchange trading of commercial banks

1.4.2.1. Concept of foreign exchange risk management of commercial banks

According to the author, banking risk management is a process of approaching risks in a scientific, comprehensive and systematic way to identify, control, prevent and minimize losses caused by risks. The risk management process usually consists of five steps: risk identification, risk analysis, risk measurement, control, risk prevention and risk financing.

1.4.2.3. The role of risk management in foreign exchange trading for commercial banks

Good banking risk management helps reduce operating costs and limit losses for banks.

Effective banking risk management contributes to creating conditions for a healthy financial situation, preventing the risk of bankruptcy and increasing the reputation of commercial banks.

Good business risk management helps promptly detect causes that may cause risks to business activities.

This process helps build a good image for the bank, meeting the requirements of domestic regulations and international standards.

An effective banking risk management system helps commercial banks gain the following positive factors in their operations.

1.4.2.3. Methods of foreign exchange risk management at commercial banks

Using overnight forex position limits

Position limits are the maximum foreign exchange position limits that each group or individual of banking is allowed to have.

Balance the foreign exchange position

Using exchange rate prediction techniques

Includes fundamental analysis and technical analysis.

Using derivatives


Different types of derivatives include: Forward contracts, Futures contracts, Options contracts, Swaps contracts and hybrid products.

Using VaR – Value at Risk

Concept of VaR

VaR is determined based on the probability distribution for the market value of the portfolio. Normally, the value fluctuations of assets follow a normal distribution, with two characteristic values: the expectation level and the variance.

VaR measurement method

Currently, Banks around the world are using three main methods to measure VaR, which are: Delta – Gamma method, analytical method and Monte Carlo method. In this thesis, the author proposes to use the analytical method to apply to Ho Chi Minh City Joint Stock Commercial Banks.

1.4.3. Factors affecting risk management in foreign exchange trading of commercial banks

1.4.3.1. Factors affecting from commercial banks

Poor compliance with the bank's risk management policies and procedures.

Prefer high risk transactions.

High trading limits and losses.

Pursuing too high profit targets.

Poor staffing.

1.4.3.2 Factors influencing from outside the bank

Government policy changes.

The domestic and foreign business environment has many potential risks.

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