In addition, the thesis consults sources of documents from government decrees, guidance documents of the State Bank, scientific journals, specialized journals, documents of scientists, opinions of colleagues and bank managers.
4.2.2. Data analysis
Collected data will be statistically analyzed, synthesized, edited and evaluated; at the same time, tables, charts and figures will be used for illustration to increase reliability in the research.
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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
6. 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
In the history of the foreign exchange market, there was a period when only large banks conducted foreign exchange transactions. That limitation was quickly broken down thanks to the development of technology, the Internet and especially software. These factors increased the liquidity of the market and reduced the cost. Gradually, profitable trading developed explosively when everyone could participate in the market.
There are three main reasons why economic actors engage in foreign exchange relations: investment, protection against foreign exchange risks and speculation. But the last reason is the main motivation of market participants, because up to 80-90% of traders aim to make a profit thanks to the difference in foreign exchange rates and gold prices. Currencies and currency pairs in the foreign exchange market are also used in financial transactions as a means of payment. It is the international payment transactions carried out by businesses and organizations that ensure the operation of the economy in general, as well as the operation and stability of the foreign exchange market in particular.
The global financial market is the largest, and no other financial market can compare to it in size, but other financial markets can influence it. For example, the US bond market can influence the value of the dollar just as the Japanese stock market can influence the value of the Japanese Yen. Foreign exchange relations are thus influenced by many factors.
changes in other markets in the economy such as commodities, bonds, stocks, etc.
The increase in global demand for goods has brought the commodity markets and the foreign exchange market closer together. Every economy in the world must import some goods for consumption, and to buy these goods, importers must exchange their currency for the currency of the country from which they want to import the goods. This transaction will increase the demand for the currency of the exporting country and increase its value. This transaction will also increase the money supply of the importing country and decrease its value. Typically, in the case of the three major exporting countries: Australia, Canada and New Zealand, the three major currencies - the Australian dollar, the Canadian dollar and the New Zealand dollar - are closely related to the value of goods. When the price of goods increases, the value of these currencies also increases and vice versa. Each currency in this group is affected by many different types of goods. For example, the Australian dollar is closely linked to the price of gold, if the price of gold increases then the value of the Australian dollar also increases and vice versa.
In addition to being affected by the commodity market, foreign exchange relations are also affected by the bond market. After the foreign exchange market, the bond market is the second largest financial market in the world, with governments, organizations, and individual investors all participating in the bond market. Each of these components has a common goal: to seek profits from their investments. Government bonds account for the largest proportion of the bond market, these bonds are investment accounts with almost zero risk because they are guaranteed by the confidence of national governments, some governments pay higher interest rates on their bonds than others. International investors earn profits when they decide which government bonds they will invest in. Bonds with higher interest rates are more attractive to investors when the economies of those bonds are developing stably.
Investors who want to buy government bonds will have to use that government's money to buy them, if investors want to buy government bonds.
In the US, they must convert to the US government currency (USD), which will increase the demand for USD and increase the value of USD. At the same time, the supply of other currencies will increase and decrease the value of those currencies. Understanding which governments offer higher interest rates on their bonds and which bonds are increasing in popularity will help us know which currency pairs to buy and which to sell.
Therefore, foreign exchange relations in the economy do not arise independently, but are always influenced by many other market factors. The above are just two typical factors that show 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
One of the fundamental differences between international trade and domestic trade is that international trade often involves the conversion of different currencies of different countries, whereas domestic trade often involves only domestic currencies. An American importer is often required to pay a Japanese exporter in Japanese Yen, a German exporter in Euros, a British exporter in Pounds, etc. For this reason, in order to pay for the goods, the American importer must purchase the appropriate foreign currencies, i.e., sell the domestic currency on the market. That is, either the buyer or the seller must be involved in the purchase and sale of foreign currencies.
Like international trade, international tourism, international investment, international credit relations and other international financial relations all give rise to the need to buy and sell different currencies in the market.
According to Marc Levinson (2005), the foreign exchange market is a decentralized and global market for trading foreign currencies. [24]
According to Investopedia, the forex market is the global market that trades foreign currencies around the clock.[29]
According to Nguyen Van Tien (2006), the buying and selling of different currencies takes place in the market, and this market is called the foreign exchange market (The Foreign Exchange Market - FOREX or abbreviated as TTNH). [9] In general: The foreign exchange market is anywhere where buying and selling of different currencies takes place.
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
Characteristics of the foreign exchange market
The TTNH does not necessarily have to be concentrated in a certain tangible geographical location, but is anywhere where the buying and selling of different currencies takes place, hence it is also called a spatial market.
This is a global market or a “never-sleeping” market. Due to the time zone differences between regions around the world, transactions take place around the clock. The market starts operating from Australia, Japan, Singapore, Hong Kong, Europe, New York, and so on. When the Asian market closes, the European market and then the American market start operating in a global closed cycle.
The center of the TTNH is the TTTLNH with members mainly being commercial banks (CBs), foreign exchange brokers and central banks (CBs). Transaction turnover on the TTTLNH accounts for 85% of total global foreign exchange transaction turnover.
Groups of market participants maintain constant contact with each other through telephone, computer networks, telex and fax. Because information is transmitted so quickly and efficiently, market participants, although located far apart, still have the feeling that they are operating under the same roof.
Because the market is global and efficient, exchange rates quoted across different markets are largely consistent with each other and have negligible variances.
This is a market that is very sensitive to political, economic, social, psychological events and many other factors.
The most active foreign exchange market is London, followed by New York, Tokyo, Singapore, Frankfurt... , this is the largest market and has the highest trading turnover.
Global TTNH has grown very rapidly in the past few decades, especially since the late 1980s, due to the following main reasons:
After the collapse of the Bretton Woods monetary system in 1973, the exchange rates of currencies around the world were allowed to float and fluctuate strongly, forcing foreign currency traders, importers, exporters and international investors to seek risk prevention measures through the foreign exchange market; on the other hand, they also took advantage of the opportunity of strong exchange rate fluctuations to speculate for profit. That increased the demand for foreign currency trading, contributing to the rapid development of the foreign exchange market.
The trend of international trade and investment liberalization is taking place strongly in both breadth and depth, including developing countries that have been actively participating in the integration process, which is a premise for countries to loosen foreign exchange management regulations to facilitate the effective flow of goods, services and international capital. This creates an increasingly large international financial market with increasingly high transaction turnover.
Advances in science and technology, especially in the field of information technology, have contributed to reducing transaction costs, increasing payment speed, and actively promoting the development of TTNH as it is today.
Besides the rapid increase in transaction turnover, international TTNH also develops strongly in depth, that is, creating many new types of business operations, which are more complex, more sophisticated and also become riskier.
Functions of the foreign exchange market
The basic function of TTNH is the natural development of one of the basic functions of commercial banks, which is: to perform payment services for customers in international trade transactions. For example, a customer who is a company that wants to import goods and services from abroad will need foreign exchange if the invoice for goods and services is in foreign currency; or an exporter who needs to convert foreign exchange into domestic currency, if the invoice for exporting goods and services is in foreign currency. Foreign exchange transactions to help customers who are exporters or importers as above are one of the services that commercial banks are always ready to provide to customers, and at the same time, are also the services that customers always expect from the Bank.
In addition to providing services to customers conducting international trade transactions, TTNH also has a number of other functions, such as:
Helps circulate international investments, credits, other international financial transactions as well as exchanges between countries.
Through the operation of the TTNH, the foreign purchasing power of currency is determined objectively according to the laws of supply and demand of the market.
TTNH is a place to trade and provide tools to hedge exchange rate risks through contracts such as forwards, swaps, options, futures and other types of combined derivative contracts.
The foreign exchange market is where the State Bank of Vietnam (SBV) intervenes to make the exchange rate fluctuate in a direction that is beneficial to the economy and in accordance with the political goals set by the State.
1.1.2.3. Participants in the foreign exchange market
Central Bank: The Central Bank performs the function of state management of foreign exchange activities, develops and promulgates foreign exchange management policies, guides and inspects the compliance with the regime of documents and reporting information related to foreign exchange activities. Therefore, the Central Bank is a subject
participate in TTNH as an organizer, controller, operator and stabilizer of TTNH.
Commercial banks: participate in the banking market as both a broker or trader for customers and an investor for their own bank. When a commercial bank is a broker, the commercial bank performs the banking function and receives service fees from customers. When a commercial bank is a trader for customers, the bank performs the function of buying and selling foreign exchange with customers, the bank maintains the foreign exchange position and accepts the risk. When a bank trades for its own foreign exchange portfolio, the commercial bank can buy and sell with customers or with other partner banks and maintain the foreign exchange position and accept the risk.
Brokers: are intermediaries in transactions on the stock exchange. The function of brokers is to provide their clients with the opportunity to trade on the stock exchange, for example, ensuring the quick and accurate execution of a currency pair at the market price, or helping clients buy/sell a certain amount of gold within a certain period of time. A brokerage firm does not trade on the stock exchange to make a direct profit for itself because it is only an intermediary and does not bear the risks of changes in foreign exchange rates or gold prices. Brokers seek profits in addition to receiving service fees, they can also enjoy the spread between the buying and selling prices.
Enterprises : The main participants in the international market are import-export enterprises. They are both the subjects of foreign currency demand and the subjects of foreign currency supply. Enterprises buy or sell foreign currency to pay for import-export contracts and their transactions are often bought and sold through commercial banks.
Other domestic and foreign individuals or organizations: according to the law, these entities cannot directly participate in the TTNH, their transactions are often carried out through commercial banks, their foreign exchange transactions must comply with the conditions prescribed by law.