3. 2011
2008
Charter Capital
100 Billion VND
2003 HCMC’s Stock
Scope of business
Exchange
1. Import - export trade
Equitizied 2. Local product trade
Construction and 3. Construction
1976 Materials Trading Joint 4. Investment
Stock Company 5. Material production
Established
Name: Transport Materials
Supply Enterprise
3
4. 60
Billions VND
50
40
30
20
loans interest expenses
10 foreign exchange loss
0
2006 2007 2008 2009 2010
Net operating profit
Profit in business concerns and joint venture
4 Other profit
5. 3,500
Billion VND
Construction
3,000
2,500 Real estate
Trading
2,000
Service provision
1,500
1,000 Finished product
500
Import Import Import Merchandises
0
2008 2009 2010
5
8. Sign import Borrow US dollar Sign domestic Receive VN dong.
contract. Settle the payment Sale contract. Pay off the loan.
30-45 days
VND Account receivable
USD Account payable USD Account payable
with seller with bank
Short cash
Cash paid Cash paid
to seller to bank.
Operating cycle
8
9. Sign import Borrow US dollar Sign domestic Receive VN dong.
contract. Settle the payment Sale contract. Pay off the loan.
USD Account payable
Signing exchange rate Paying exchange rate
USD Account payable USD Account payable
The transaction exposure gain/loss
Original VND Account payable Actual VND account payable
Estimated the selling price
9
10. Number of Total Import Transaction
Year
Contracts value (USD) Exposures (VND)
2006 2 1,029,600 8,244,000
2007 2 1,779,300 -166,818,300
2008 3 2,295,500 -1,501,592,500
2009 3 2,713,000 -1,091,423,500
2010 3 2,584,000 -1,350,875,000
The trading band increased up to 5%
The average interbank exchange rate increased up to 2 times every year.
10
11. Sign import Borrow US dollar Sign Sale Receive VN dong.
contract. Settle the payment contract. Pay off the loan.
Price Lock the selling price
decision
Operating cycle Paying rate
Invoicingrate
Signing rate
Import proposal
11
13. Import Transaction Transaction
Number of
Year Value Exposures Exposures after
Contracts
(USD) (VND) hedging (VND)
2006 2 1,029,600 8,244,000 109,231,200
2007 2 1,779,300 -166,818,300 30,478,800
2008 3 2,295,500 -1,501,592,500 -694,439,000
2009 3 2,713,000 -1,091,423,500 -621,860,500
2010 3 2,584,000 -1,350,875,000 -725,330,000
13
14. Sign import Borrow US dollar Sign Sale Receive VN dong.
contract. Settle the payment contract. Pay off the loan.
Lead the Lead the Lead the
payment payment payment
Price Borrow Sign Forward /
decision VND Option contracts
Risk Sharing
14
15. Sign import Borrow US dollar Sign Sale Receive VN dong.
contract. Settle the payment contract. Pay off the loan.
Lead the Lead the Lead the
payment payment payment
Signing rate Transaction Risk Paying rate
Methods to shorten the period of outstanding payables
Push up the process of finding domestic buyers
Conduct some incentives to encourage the buyers to
settle the receivable payment early.
15
16. Sign import Borrow US dollar Sign Sale Receive VN dong.
contract. Settle the payment contract. Pay off the loan.
Lead the Lead the Lead the
payment payment payment
Price Borrow Sign Forward /
decision VND Option contracts Transaction term
Risk Sharing
USD account payable VND account payable
16
17. Sign import Borrow US dollar Sign Sale Receive VN dong.
contract. Settle the payment contract. Pay off the loan.
Risk Sharing
When signing sale contract with domestic buyers, the sale
employee can add an additional condition under a form of a
price adjustment clause.
Neutral Zone
Risk sharing Risk sharing
Paying rate
17
18. To help the company avoid unnecessary cost.
To help the company avoid conflicts with share holders.
To provide guidance to managers.
Type and
degree of Strategy Pros and Hedging Implement- Measure-
Decision
the exposure objectives Cons tools ation ment
18
19. Type and
degree of
the exposure
Transaction exposure
The company does not have inflow USD from export activities.
During the economic crisis, most of the steel beam import
contracts have suffered from transaction exposures.
19
20. Type and
degree of
Decision
the exposure
Reasons for hedging
To improve the budgeting and planning capability.
To reduce the likelihood that the real profit of an import contract
will below a necessary minimum.
To avoid negative effects of external shocks.
20
21. Type and
degree of Strategy
Decision
the exposure objectives
Short-term: To minimize transaction exposure.
Long-term: To avoid large foreign exchange losses.
21
22. Type and
degree of Strategy Pros and Hedging
Decision
the exposure objectives Cons tools
Long -term Short-term (Economic crisis)
Lead strategy Price decision
Price decision Risk Sharing
Risk Sharing Forward contract
22
23. Type and
degree of Strategy Pros and Hedging Implement-
Decision
the exposure objectives Cons tools ation
Considerations when implementing the hedging tools.
To clarify the responsibilities.
To set up the criteria for performance appraisals.
To monitor the foreign exchange fluctuations.
23
24. Type and
degree of Strategy Pros and Hedging Implement- Measure-
Decision
the exposure objectives Cons tools ation ment
Establish measurement for the hedging strategy
Compare cost and profit of its import activities with some
companies in the same industry
Compare the profit of import contracts without hedging
with the profit of contracts after hedging.
24
25. • Price decision
• Risk sharing
Short-
term • Forward contract
• Lead strategy
• Price decision
Long-term • Risk sharing
Type and degree of the exposure Decision Strategy objectives
Hedging
strategy Measurement Implementation Hedging tools Pros and Cons
25
28. Foreign Exchange Exposure
Translation
Economic exposure exposure
Transaction
exposure
Operating
exposure
“Transaction exposure refers to potential changes in the value of
contractual future cash flows, or monetary assets and
liabilites, resulting from changes in the exchange rate.”
(Alan C.Shapiro, 2005)
28
29. A. Cost of good sold (USD) 780 780
Input price CFR HP 630.00 630.00
Insurance premium 0.07% 0.44 0.44
CIF price 630.44 630.44
Import tax: 10% 63.04 63.04
VAT of Import 69.35 69.35
LC fee 1.90 1.90
Estimated interest 5.11 5.11
Direct fee 10.00 10.00
Estimated cost of input
Signing rate: 18,479VND/USD 14,410,666.73 14,664,000.00
B. Total value of output (VND) 14,839,000.00 14,839,000.00
Estimated selling price (Without VAT) 13,490,000.00 13,490,000.00
C. Profit (B-A) (VND) 428,333.27 175,000.00
VAT: 38,939.39 15.909.090
Profit per unit 389,393.89 159,090.91
Total profit: 600MT 233,636,331.80 95,454,545.45
29 Estimated rate of return: 2.89% 1.18%
32. Commodity H400 H400
Price decisions
A. Cost of input (USD) 780 780
Input price CNF HP 630.00 630.00
Insurance premium 0.07% 0.44 0.44
CIF price 630.44 630.44
Import tax: 10% 63.04 63.04
VAT of Import 69.35 69.35
LC fee 1.90 1.90
Interest 5.11 5.11
Direct fee 10.00 10.00
Signing exchange rate: 18,479VND/USD 14,410,666.73
Invoicing exchange rate: 18,700VND/USD 14,583,011.41
B. Total value of output 14,839,000.00 15,015,000.00
Selling price (Without VAT) (VND) 13,490,000.00 13,650,000.00
C. Profit (B-A) 428,333.27 431,988.59
VAT: (B-A)/1.1 x 10% 38,939.39 39,271.69
Profit per unit (B-A)/1.1 389,393.89 392,716.90
Total profit: 600MT 233,636,331.80 235,630,142.58
32 Estimated rate of return (VND) 2.89% 2.88%
33. Sign import Borrow US dollar Sign Sale Receive VN dong.
contract. Settle the payment contract. Pay off the loan.
Signing rate: 18,479VND/USD Selling price: Paying rate
Import price : 630USD/MT 13,490,000VND/MT 19,080VND/USD
+190VND/USD x 630USD
~138,700VND/MT
380VND/USD
Neutral Zone
18,200 18,700
19,080
33
34. To help the company avoid unnecessary cost.
To decide whether a hedging strategy is necessary or not.
To decide which is the right hedging technique.
To help the company avoid conflicts with shareholders.
To clarify clearly the necessities of a hedging strategy.
To help the shareholders evaluate and understand the
effectiveness of the strategy.
To provide guidance to managers.
What should the managers do if the company is facing
transaction exposures?
In which cases a hedging strategy is necessary?
How to establish, implement and measure the strategy?
34
35. To improve the budgeting and planning capability.
To reduce the risk in future cash flow.
To control the current and future cost of import
To control the real profit of an import contract.
To minimizes the sensitivities of estimated profit with foreign
exchange fluctuation.
To avoid negative effects of external shocks.
Economic crisis is unavoidable
To deal with major shocks from the environment quickly
and effectively.
35
36. The managers do not want to take on responsibilities.
Shareholders do not understand the necessity of a hedging
strategy.
The company does not pay attention to risk management.
Some hedging tools are costly, unpopular and hard to
implement.
36
37. Allowable Variations around Official Exchange Rate Mar 1989 - Mar 2011
To continous using price decisions technique.
To apply lead strategy into the whole process of Steel trading.
To began using risk sharing in some contracts with familiar
buyers.
37
38. 1.Hedging tools can also be used for locking the profit.
2.Hedging enables traders to survive hard market periods.
3.Successful hedging gives the trader protection against currency
exchange rate changes
4.Hedging can also save time as the long-term trader is not
required to monitor/adjust his portfolio with daily market volatility.
38
39. 1.Hedging involves cost that can erodethe profit.
2.Risk and reward are often proportional to one other; thus
reducing risk means reducing profits.
3.For most short-term traders, hedging is a difficult strategy to
follow.
4.If the market is performing well or moving sideways, then
hedging offer little benefits.
5.Hedging is a precise trading strategy and successful hedging
requires good trading skills and experience.
39
40. Hedging techniques Costs
Tighten creadit (Lead Lost sale and profits
Strategy)
Borrow locally Higher interest rate
Risk Sharing Lost sale contracts.
Price decision High selling price, Lost sale contracts.
Forward contract Rate difference between a spot foreign exchange rate
and foreign exchange rate in forward contract
Option contract Rate difference between a spot foreign exchange rate
and (exercising rate plus the option premium).
40
41. Unit price Total value
Commodity: Hot rool steel
USD/MT USD/9000MT
I. Cost of good sold 8,264,182.30
Import price (CFR) 854.33 7,689,000.00
Insurance premium 0.07% 0.07% 5,382.30
LC fee 1,000.00
Direct fee 2.2 19,800.00
Processing cost 61 549,000.00
Total cost 8,264,182.30
II.Selling price (without VAT) 1020 9,180,000.00
III.Profit 915,817.70
IV.Revoked waste materials 18 162,000.00
V. Cost
Interest rate 26 234,000.00
Administrative costs 11,250.00
Depreciation 25 225,000.00
41 VI. Real Profit 607,567.70