Documente Academic
Documente Profesional
Documente Cultură
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Legal activities......................................................................................... 37
CONCLUSION.................................................................................................... 39
References:...................................................................................................... 40
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Exchange rate risk is the risk of an investment's value changing due to changes in currency
exchange rates; the risk that an investor will have to close out a long or short position in a
foreign currency at a loss due to an adverse movement in exchange rates and also known as
"currency risk" or "exchange-rate risk".
1.1.2.
Numerous factors determine exchange rates, and all are related to the trading relationship
between two countries. Exchange rates are relative, and are expressed as a comparison of
the currencies of two countries. The following are some of the principal determinants of the
exchange rate between two countries. Note that these factors are in no particular order; like
many aspects of economics, the relative importance of these factors is subject to much debate.
1.
Differentials in Inflation
As a general rule, a country with a consistently lower inflation rate exhibits a rising
currency value, as its purchasing power increases relative to other currencies. During the last
half of the twentieth century, the countries with low inflation included Japan, Germany and
Switzerland, while the U.S. and Canada achieved low inflation only later. Those countries
with higher inflation typically see depreciation in their currency in relation to the currencies
of their trading partners. This is also usually accompanied by higher interest rates.
2.
Interest rates, inflation and exchange rates are all highly correlated. By manipulating
interest rates, central banks exert influence over both inflation and exchange rates, and
changing interest rates impact inflation and currency values. Higher interest rates offer lenders
in an economy a higher return relative to other countries. Therefore, higher interest rates
attract foreign capital and cause the exchange rate to rise. The impact of higher interest rates
is mitigated, however, if inflation in the country is much higher than in others, or if additional
factors serve to drive the currency down. The opposite relationship exists for decreasing
interest rates - that is, lower interest rates tend to decrease exchange rates.
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Current-Account Deficits
The current account is the balance of trade between a country and its trading partners,
reflecting all payments between countries for goods, services, interest and dividends.
A deficit in the current account shows the country is spending more on foreign trade than it is
earning, and that it is borrowing capital from foreign sources to make up the deficit. In other
words, the country requires more foreign currency than it receives through sales of exports,
and it supplies more of its own currency than foreigners demand for its products. The excess
demand for foreign currency lowers the country's exchange rate until domestic goods and
services are cheap enough for foreigners, and foreign assets are too expensive to generate
sales for domestic interest.
4.
Public Debt
Countries will engage in large-scale deficit financing to pay for public sector projects and
governmental funding. While such activity stimulates the domestic economy, nations with
large public deficits and debts are less attractive to foreign investors. The reason? A large debt
encourages inflation, and if inflation is high, the debt will be serviced and ultimately paid off
with cheaper real dollars in the future.
In the worst case scenario, a government may print money to pay part of a large debt, but
increasing the money supply inevitably causes inflation. Moreover, if a government is not
able to service its deficit through domestic means (selling domestic bonds, increasing the
money supply), then it must increase the supply of securities for sale to foreigners, thereby
lowering their prices. Finally, a large debt may prove worrisome to foreigners if they believe
the country risks defaulting on its obligations. Foreigners will be less willing to own securities
denominated in that currency if the risk of default is great. For this reason, the country's debt
rating is a crucial determinant of its exchange rate.
5.
Term of Trade
A ratio comparing export prices to import prices, the terms of trade is related to current
accounts and the balance of payments. If the price of a country's exports rises by a greater rate
than that of its imports, its terms of trade have favorably improved. Increasing terms of trade
show greater demand for the country's exports. This, in turn, results in rising revenues from
exports, which provides increased demand for the country's currency (and an increase in the
currency's value). If the price of exports rises by a smaller rate than that of its imports, the
currency's value will decrease in relation to its trading partners.
6.
Foreign investors inevitably seek out stable countries with strong economic performance in
which to invest their capital. A country with such positive attributes will draw investment
funds away from other countries perceived to have more political and economic risk. Political
turmoil, for example, can cause a loss of confidence in a currency and a movement of capital
to the currencies of more stable countries.
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Types of
exchange rate
risk
Translation
risk
Economic
risk
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2.1. In India
The transformation from fixed ER regime to floating ER regime as well as the
development of derivative tools in India followed the process of liberalizing the India
Economy in 1992.
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Source: vneconomy.com
As mentioned above, exchange rate change has outstanding impact on the export
import turnover. The table below shows the fluctuation in the exchange rate and the change
in the export import turnover in Vietnam from 2007 to 2010.
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From the table above, the value of export-import turnover is performed clearly through
this graph below to evaluate the impact of exchange fluctuation on export-import activity:
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With the impact of exchange rate fluctuation, we can conclude that there was a difference
between enterprises (FDI) and domestic enterprises. The trend was upward with the change in
export-import quantity. To export enterprises (FDI), the export turnover fluctuated slightly
and reached 68,3 billion USD, while the import turnover was quite the same with about 62
billion USD. This can be considered a pleasant signal for the enterprises granting from FDI.
For domestic enterprises, the quantity was quite high with the export turnover at the level of
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1.3. Situation of risks export-import enterprises have to face with (Risk assessment)
Exchange rate (domestic currency/foreign currency) fluctuation is an important factor
affecting the production of enterprises, especially export-import business. Besides, the
abnormal fluctuations in exchange rates may cause incalculable risks for the import and
export business.
Risks that export-import enterprises may get stuck in:
1.3.1.
*To exporter
When the exchange rate increase, the exporters may confront with economic risks
In this case, exporting enterprises also have many advantages because exchange rate rise
means that profits are provided by VND will increase. However, besides the advantages,
export enterprises have to cope with the increase in costs resulting from the purchase of raw
materials for businesses because domestic suppliers of raw materials would raise the price in
terms of exchange rate and the price increase may be higher than exchange rate growth. This
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*To exporter:
When rates fall, the exporters will have difficulty in exporting goods because of the
difference between the selling price and the cost of inputs. At the same time, the reduced rate
can cause damage to the business based on the following aspects: management activities,
materials, labor, .... more negative
results are now possible and
cause signal loss. This risk is
referred to as economic risk
*To importer:
When rates fall, import firms
cannot sell USD holdings to pay
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Case study:
Binhminh Plastic JSC. importing 2500-3000 tons of material monthly lost 5 billion in May and
June 2008. In addition, according to leaders of Vietnam Textile and Garment Group, at that time, the
Group was damaged up to about 50 billion dollars due to the difference between the USD revenue
from export sales to commercial banks and USD buying price serving importation of raw materials.
In the first 10 months of 2009, the Vietnam Petroleum Transport Company (VIP) announced pretax profit was 101.8 billion, reaching 115 % of the plan. But in 12-2009, Resolution Board of
Directors announced an adjustment for expected profit from initial 88.5 billion to 55 billion.
According to VIP, reducing the profit plan was because the company must provision rate risk
increased over time. VIP loans were about $60 million, account of provision was 30 billion, pre-tax
profit was affectedMeanwhile, once the government had announced changes in exchange rate of US
dollar and Vietnam dong on 25-11-2009 shall be 5.44 % higher, PV Drilling (PVD) planned profit
would decrease by 5 % less than expectation due to provision for exchange rate risk. To Pha Lai
Thermal Power Company (PPC), business results after 11 months was positive, sales reached 4106
billion. However, at the end of 2009, Mr. Nguyen Khac Son, PPCs general manager, said: due to
the provision of exchange rate difference by about 527 billion, therefore, profit of last year was just
over 500 billion. As a domestic enterprise, export sale of the company DHG was not significant
(Only about US $ 1.5-2 million/year); while the price of imported raw materials was quite large
(about 30 million US dollars/year), the exchange rate change has had a major impact on production
costs of the company. These are examples of the impact of exchange rate risk for the export-import
activities of export-import enterprises.
In summary, sensitivity to exchange rate risk in Vietnam enterprises is engaged to import and
export activities highly increases in recent years. That is exactly what the business needs to be noted
and do research to find methods to limit losses, maintain operations and enhance competitiveness in
export-import enterprises
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There are internal and external causes, which lead to the difficulties or drawbacks in
managing exchange rate risks in export-import companies that required being clearly
identified to recommend suitable solutions
Lacking long term vision and knowledge about modern exchange rate management
model that developed countries are using all over the world
Building up an incorporated and comprehensive risk-controlling program has many
benefits; it not only helps to control exchange rate risks but also minimize other risks due to
its mutual influence within a company. Many domestic companies do not understand the
importance of building this program or they just manage risks partly or single, not
incorporated.
In reality, many companies do not realize that pay an amount of money (premium) for
derivative instrument will bring back the peace of mind when doing business because it helps
to plan and control costs and risks in the future. Instead, they have their short-term goal is to
gain profit and not get loss. That is the reason why when the fluctuation happens does not
meet their expectation, companies stop to use derivative instrument without caring about their
effectiveness in the long term. The cause that leads to limitation of exchange rate risks
management mentioned here is that companies only care about the profit that derivative
instruments bring back, not care much about its function to prevent risks.
Business culture inside companies
One big cause that leads to the limitations mentioned above is unfair business environment
inside some companies. In some state companies, working is usually in a formal way, which
limits the creativeness of the staff, and cause people do work like an engine, not creative and
active to prevent and control risks.
Otherwise, the implicit protection policy of the State that keep the exchange rate of
USD/VND and the basic interest of VND stable over years makes companies not careful in
preventing risks.
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External causes
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Foreign
exchange
Options
Hedges
Foreign
currency
options
Methods
Foreign
exchange
Forward
Hedges
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Step one involves identifying and measuring the foreign exchange exposures that you
want to manage. As mentioned earlier, the focus for most companies is on transaction risk.
For an exporting company paid in U.S. dollars, measuring exposure involves subtracting the
U.S. dollars it expects to receive over a one year period, for example, against the money it
will need in order to make payments in U.S. dollars over the same period. The difference
determines the exposure to be hedged. If your company already has U.S. dollars in the bank,
subtract the account balance to determine the net exposure. Some companies only include
confirmed transactions while others include both confirmed and forecasted foreign currency
cash flows over the designated time period.
Once you have calculated your exposure, you need to develop your companys foreign
exchange policy as part of step two. This policy should be endorsed by the companys senior
management and usually provides detailed answers to questions such as:
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2.2. Managing the State foreign exchange reserves in order to ensure the safety,
liquidity and profitability
The State foreign exchange reserves management in 2011 continued to ensure principles of
safety, liquidity, and profitability, the reserves size increased. When the supply and demand in
the FX market were imbalanced, the reserves were used flexibly to stabilize the FX market,
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CONCLUSION
In the present era of increasing globalization and heightened currency volatility, changes in
exchange rates have a substantial influence on companies operations and profitability.
Exchange rate volatility affects not just multinationals and large corporations, but small and
medium-sized enterprises as well, even those who only operate in their home country. While
understanding and managing exchange rate risk is a subject of obvious importance to business
owners, investors should be familiar with it as well because of the huge impact it can have on
their investments.Measuring and managing exchange rate risk are important functions in
reducing a firms vulnerabilities from major exchange rate movements. These vulnerabilities
mainly arise from a firms involvement in international operations and investments, where
exchange rate changes could affect profit margins, through their effect on sources for inputs,
markets for outputs and debt, and the value of assets. In this paper, we also tried to provide
brief overview and the issues associated with managing currency risk, in which alternative
methods have been presented. Prudent management of currency risk has been increasingly
mandated by corporate boards, especially after the currency-crisis episodes of the last decade
and the consequent heightened international attention on accounting and balance sheet risks.
Multinational firms utilize different hedging strategies depending on the specific type of
currency risk. These strategies have become increasingly complicated as they try to address
simultaneously transaction, translation and economic risks. As these risks could be
detrimental to the profitability and the market valuation of a firm, corporate treasurers, even
of smaller-size firms, have become increasingly proactive in controlling these risks. Thereby,
a greater demand for hedging protection against these risks has emerged and, in response, a
greater variety of instruments has been generated by the ingenuity of the financial engineering
industry. Despite our efforts in doing this research, there are inevitable mistakes as well as
deficiencies in the depth study, we hope this paper could be helpful to readers as to give a
basic overview of management of exchange rate risk in general and in Viet Nam in particular.
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