(TIỂU LUẬN) assignment 2 – FX market analysis and trading strategies

Subject Code:

BAFI3182

Subject Name:

Financial Markets

Location & Campus

RMIT Vietnam , SGS

TRAN QUYNH NHU – s3715434
Student name:

TRUONG QUYNH NHU - s3694814
AN THANH HANG - s3634827

Teachers Name:

Mr. M Truong

Assignment 2 – FX Market Analysis and Trading Strategies


Table of Contents
EXECUTIVE SUMMARY

2

I.

INTRODUCTION

3

II.

ANALYSIS AND TRADING STRATEGIES

4

1. FX MARKET PAST BEHAVIOR ANALYSIS
2. FX MARKET ELEMENT ANALYSIS
2.1 INFLATION RATE
2.2 INTEREST RATE
2.3 ECONOMIC GROWTH
2.4 INTERNATIONAL SPECULATION
2.5 FX EXPECTATION
2.6 COMMODITY PRICE (GOLD/OIL)
2.7 OFFICIAL INTERVENTION
2.8 SUMMARY

4
6
6
9
11
14
15
16

17
17

III.

17

1.
2.
IV.

TRADING STRATEGY
TRADING STRATEGY FOR USD/CNY BID/OFFER
TRADING STRATEGY FOR USD/VND.
CONCLUSION

V. APPENDIX
VI. REFERENCES

18
21
22
23
23


Executive Summary

This report is aimed at deriving appropriate strategies to benefit from currency
fluctuations in the foreign exchange market for the Vietnamese Bank Vietcombank-Joint

Stock Commercial Bank for Foreign Trade. This report will consist of two main parts: (1) an
analysis of foreign exchange market behaviors and related elements; (2) recommended
trading strategies. In order to deliver the best advice, this report will take into consideration
many elements that can directly affect the currencies such as past FX market behaviors,
economic elements indirectly influencing the currency of all three nations USA, China and
Vietnam i.e. economic growth, relative inflation rate, relative interest rate, international
speculation, foreign exchange market speculation, commodity prices and official
intervention. Despite careful analysis, there is currently high volatility in the foreign
exchange market as of now due to the brewing trade tensions between China and the US.
Thus, we will offer risk management strategies in the case of unpredictable market changes
due to any changes in world events.

With an expectation that within the next 6 months, the USD will depreciate against the CNY
and VND, our strategy is to sell off USD at the moment to buy CNY and VND and later on
after 6 months we will try to buy back the USD to square our position. Should the market
follows our expectation, the planned profit will be CNY 3,771,700 and VND 802,000,000. To
manage unexpectable risk, we also recommend trade in small quantity and follow closely to
the exchange rate, to have any needed action should the market go against our plan.


I.

Introduction
Vietcombank-Joint Stock Commercial Bank for Foreign trade of Vietnam is one of the
biggest bank in the Vietnamese market capitalization with an estimated evaluation of 85,014
billion VND (US$3.98 billion) as stated in Ho Chi Minh City Stock Exchange (CafeF.vn, 2018).
JSC Bank for Foreign Trade of Vietnam, once known as Bank for Foreign exchange of
Vietnam, was established on April 1st, 1963 from the Foreign Exchange Bureau (of the State
Bank of Vietnam), becoming the first commercial bank decided for pilot privatization by the
Government.

After over 50 long periods of development and advancement, Vietcombank has
contributed essentially to the strength and development of national economy, maintaining
the part of a considerable foreign exchange bank in encouraging productive domestic
economy and additionally impacting significantly on local and worldwide money related
network.
Specifically in this report, our team working for Vietcombank sets the main objective
is to develop an strategy of trading in the foreign exchange market. We chose two pairs of
currencies which are USD/CNY and USD/VND since there have been a number of remarkable
economic events recently affecting the market. We predict that USD will depreciate against
and CNY. The report will include analysis of past performance of both currencies and the
trading strategy for 2019.


II.

Analysis and trading strategies
1. FX Market Past Behavior Analysis
1.1 USD/CNY

Figure 1: USD/CNY exchange rate 2015-2018 (reproduced from Thomson Reuters Eikon)

It can be clearly seen that the relationship between USD and CNY was extremely unstable
from 2015 to half of 2018. With China’s effort to modify

the traditional fixed exchange

rate, China-USD exchange rate was gradually increasing its value from quarter 2, 2015 then
reaching a peak at 6.9330 in December when China became the US’s biggest trading partner
with the trading valuation was valued at $441.6-billion (U.S.) to the end of September which
accounted for 15.7% of total U.S. trade quantity, according to the U.S. Commerce

Department (IAN, 2016). However in 2017, The U.S. trade deficit with China set a record
since Canada became the US no.1 foreign oil supplier with price lower than the average
climb at that time which lead to a dramatically fall in exchange rate until the second quarter
of 2018 (Ken, 2018).


Figure 2: USD/CNY forecast exchange rate 2015-2018 (reproduced from Thomson Reuters
Eikon)
The exchange situation has been increasing remarkably to the historical peak when the US
president Donald Trump announced to set up policy to put tariff on Chinese goods trade to
the US (Sophie, 2018). However since July when the tariff will be applied directly, the trading
activities are predicted to decrease (purple line in the figure 2). As a result the exchange rate
between USD and CNY is forecast to drop. Additionally, China Yuan has been weaken due to
the government’s strategy and soon rising up, USD might depreciate against CNY in the next
period of time (Chaeng, 2018)
1.2 USD/VND

Figure 3: USD/VND exchange rate 2015-2017 (reproduced from Thomson Reuters Eikon)

Contrast to CNY, the exchange rate of VND and USD has been increasing constantly since
2015. Even though there were some fluctuate in 2016, the USD raised its value by 22,800 in
2017 as a result when Vietnam has considered the United States as its top single-country


export partner and shipping value is approximately $46.484 billion last year (Ralph, 2018).
The trading between 2 currencies rose significantly during the first 6 months of 2018 with
the trading activities up to $27.44 billion according to US Census Bureau data.

Figure 4: USD/VND forecast exchange rate 2018-2019 (Retrieved from Thomson Reuters
Eikon)

However, Vietnam is forecast to reduce the trade with US due to the decision of the US
president Donald Trump to withdraw from Trans-Pacific Partnership (TPP) in which trade
agreement will obliterate the main priority of trade relations between Vietnam and USA
(Everycsrreport.com). That is the reason why the exchange rate between 2 countries is
predicted to go down (purple line in the figure 4)

2. FX market element analysis
2.1 Inflation rate
2.1.1 US inflation rate


Figure 5: US inflation rate (Retrieved from Thomson Reuters Eikon)

The US inflation rate has been steadily increasing since the beginning of the year to a high of
3% from its 1.7% since the beginning of 2018. This reflects steady economic growth in the
US. However, despite a tightening labour market, wages growth remain slow, not catching up
to the rise in inflation. The Federal Reserve recent increase interest rates is expected to
counteract this rising inflation rate.

Figure 6: US inflation rate forecast (Retrieved from Thomson Reuters Eikon)
The Federal Reserve recent increase interest rates is expected to counteract this rising
inflation rate. Hence, it is projected that the US inflation rate will slow down in the next few
quarters to 2.70% and 2.50% from its current high of 3.0%.

2.1.2 China Inflation rate


Figure 7: China inflation rate 2015-2017 (Adapted from Thomson Reuters Eikon)
China’s inflation has been steadily decreasing from its high at 3% since the beginning of 2018
down to 2.0% in July 2018. It is expected that it will continue steadying out to 2.20% by the

end of 2018.

Figure 8: China’s inflation forecast 2018-2019 (Retrieved from Thomson Reuters Eikon)

2.1.3 Vietnamese Inflation rate

Figure 7:

Vietnam

inflation

rate

2008-

2018

(Adapted

from

Thomson

Reuters

Eikon)

Overall, there has been a reducing trend in Vietnam’s inflation rate thanks to government
effort to adjust policy. On a monthly basis, consumer prices edged up 0.08 percent, following

a 0.27 percent drop in March. Inflation Rate in Vietnam averaged 6.44 percent from 1996
until 2018, reaching an all-time high of 28.24% in 2008 and ending up at 3.15% in 2018.
However, inflation rate has been alternated frequently during the time of 2016-2018. In
2017, the Vietnamese economy achieved a double success: controlling inflation and


economic growth exceeding the target set by the National Assembly (NA) as the average CPI
increased 3.53 per cent over 2016 and 2.6 per cent compared to December 2016, fulfilling
the target of keeping the rate under 4 per cent for the whole year (Vietnamnet, 2018).
However, inflation rate in 2018 are forecasted to be pressured as long as economic growth
are also predicted to increase. Vietnam’s inflation will be mainly pressured by change in the
prices of public services and food as well as fluctuation of oil price which already rise the
inflation to 3.15% in January 2018 (Nhan Dan Online, 2018).

2.2 Interest Rate
The interest rate has an important correlation with the strength of a currency as interest
rates will often influence the decisions of investors. Should interest rates go up, it would
prove to be beneficial as investment would see higher returns and vice versa. Thus, higher
investment will drive up demand for the US dollar and cause it to appreciate.

Figure 8: US interest rates forecast (Retrieved from Thomson Reuters Eikon)

The Federal Reserve have been steadily increasing interest rates over the past few years and
is expected to continue increase the interest rate in the next few quarters (Reuters, 2018).
As can be seen above, the interest rate is currently at 2% and is expected to go up to 2.1%
and 2.4% in the last two quarters of 2018, respectively. While usually, interest rates
increases might boost investment, current slow wages growths coupled with low
employment and rising inflation indicates no real benefit for investors. Thus this increase in
interest rates will not have much effect on the currency strenth in the near future.

Figure 9: China’s interest rate forecast (Retrieved from Thomson Reuters Eikon)

China’s government is keeping the country interest rate at a stable benchmark due to its
current efforts to stabilize growth. It will keep its interest rates at around 4.3% all through
2018 as well as into 2019. This rate is still quite an attractive rate as it still remains higher
than the US’s rate of 2.0%. Coupled with its steady low inflation rate, China proves to be an
attractive investment destination. This will undoubtedly have an effect on its currency as
demand for it will maintain high, causing appreciation.
Figure 10: China’s interest rate forecast (Retrieved from Thomson Reuters Eikon)

As can be seen from the graph, Vietnam’s interest rate is the highest among the three
countries with it currently being at 6.26%. This rate indicates Vietnam current status as a
fast-growing, emerging economy that is very attractive towards foreign investors. In the next
few quarters, it is projected that the interest rate will keep increasing to 6.30% to the end of
2018. This is a positive indication for the Vietnamese Dong as recent slopes will recover as
prospects remain high and attractive towards foreign investors.


2.3 Economic growth
2.3.1 US growth

The US economy has been growing steadily and hit its peak in the second quarter of 2018
with a growth rate 4.1% thanks to the short term effects of the loosening tax policies. In
addition, the Fed’s increase in interest rates as mentioned above signifies a steadily growing
economy driven by high private consumption as well as increasing foreign investment (OECD,
2018).
However, it is projected that the economy will slow down in the next two quarters with
growth rates dropping to 2.8% and 2.6% in quarter 3 and 4 of 2018, respectively. This was
ushered on by the recent rising tensions in the trade war initiated by the US President where

a series of tarriffs were implemented on Chinese goods, in terms causing retaliations from
China.
Growth remaining steady means that the USD would remain in demand as rising interest
rates will boost invesment as well as foreign demand; however, trade related concerns
signify as risk that would detract foreign investors as well as impede exports due to trade
relatiation caused by the trade wars and thus would cause a depreciation to the dollar.

Figure 11: US GDP quarter % change forecast (Retrieved from Thomson Reuters Eikon)


2.3.2 Vietnam growth
Vietnam is expected to continue strong growth throughout the end of 2018 and to 2019
with predicted growth rates at 7.1% and 6.8%, respectively (Asian Development Bank, 2018).
Recent rises in global trade prompted exports to rise by 21.2% (Asian Development Bank,
2018). This growth is also prompted by a high increase in aggregate demand since 2017 has
been ushered by strong demand from the private sector fueled by FDI as well as private
consumption. Stable rise in income and a steady rate of inflation is another confirmation for
investors’ confidence.

Vietnam projected growth rate in 2018 (Adapted from Thomson Reuters Eikon)

Figure 12: Vietnam GDP quarter % change forecast (Retrieved from Thomson Reuters Eikon)

Recent trade tensions between China and the United States did have some minor impacts on
the Vietnam economy as indicated through its currency depreciation as well as stock market
plummits. The affect from the trade war on Vietnam was indirect as the tarriffs on Chinese
goods were the hi-tech produces and not on essential goods such as energy. It was rather
prompted by investors’ overreaction to the uncertainty, causing them to withdraw capital
from emerging markets such as Vietnam. However, it is expected to recover as trade tension
eases between the two economic powerhouses. In addition, as one of the strongest

emerging economies in SEA with the highest and most stable growth rate (Asian
Development Bank, 2019). Thus, it is expected the Vietnamese dong will recover despite


losses from the Chinese-US trade tension impact.

2.3.3 Chinese growth
As China is one of the fastest growing economy in the world, there have been recent focus
on ensuring that growth is sustainable and high quality. Growth rates still remain at one of
the highest in the world at 6.40% in the second quarter of 2018. Because of the focus on
building more sustainable growth, it is projected that growth will steadily slow down with
6.30% being the forecast for the third and fourth quarter of 2018. (Thomson Reuters)

Figure 13: China GDP quarter % change forecast (Retrieved from Thomson Reuters Eikon)
This growth is prompted by the surge in export demand as well as private consumption
thanks to rising income and a stable inflation rate. There have also been a focus on
infrastruture investment prompting higher domestic consumption. High growth rates and a
re-focus on sustainable growth will be an assurance for investors’ confidence and will
encourage more consumption of the Chinese Yuan.

However, the recent trade war between the US and China cause major doubts among
investors as we see the Chinese Yuan plummeted for consecutive weeks. But recent talks of
a meeting between the two governments have eased tensions. Thus, it is expected that the
Yuan will recover and appreciate in the next few quarters.

2.4 International speculation
International speculation play a major role in the foreign exchange market as speculative


buying make up a large section of it as well as drive investment decisions. In this case, the

ongoing trade war between US and China is a significant event to look to as it has already
caused major shifts in the foreign exchange market.

Impacts of the trade war might heavily affect the currency of both China and the US as
tariffs from the US might cause a deficit up to $50bn on Chinese goods. This has cause the
Chinese Reminbi to slope down for 8 consecutive weeks causing much concerns among
foreign investors. The depreciation of the Chinese Yuan has a reverse effect than what the
US president might have intended as it only made Chinese exports more attractive to
investors due to the low prices. The rising demand for Chinese goods will cause a higher
demand for Chinese Yuan causing the currency to move up in the near future. Plus, the US
trade deficit with China remain at an all time high, suggesting despite recent hikes in the
dollar, it will eventually depreciate against the Chinese Yuan. In addition, there have been
recent efforts to negotiate between China and the US to ease tensions. Thus, the Chinese
Yuan should appreciate in the next few quarters.

Figure 14: CNY/USD and VND/USD forecast (Retrieved from Thomson Reuters Eikon)

The effect of the trade war between the US and China had a wide ranging impacts on many
of their partner countries, including Vietnam. The spill-over effects from the trade tensions
has cause currency in the Asian region, especially Vietnam to depreciate for many weeks due
to the uncertainty and risk-aversion behaviors from investors. However, as news of talks
between the governments suggest ease in trade tension, the Chinese Yuan is expected to
stabilize and rise again. In effect, it will pull up the Vietnamese Dong as Vietnam’s economy
itself is an emerging economy with currently one of the highest growth rates in the


Southeast Asian region.

2.5 FX expectation
Expectations of the foreign exchange market will have an influence on the currency as

speculators buy and sell currencies base on their speculations in hopes of arbitraging from
the differences in prices. It is no surprise that the effects of the brewing trade war between
China and America has cause speculation to go wild. Recently, thanks to the US-China trade
talks scheduled for August 21-22 (Reuters, 2018), confidence in the USD has subdued as can
be seen by a drop in the US dollar index in the past few days. The US dollar index is a good
indicator of the reaction and speculation as it measures the US dollar against a basket of six
other major currencies, indicating that the strengthening of the US Dollar was only
temporary due to the imposing of the tarriffs.

Figure 15: US Dollar Index (Retrieved from Thomson Reuters Eikon)
While it is only early talks, current economic conditions among China, US shows that China
still remains the more prospective economy. This will reassure investors confidence, causing
the Chinese Yuan to appreciate.

2.6 Commodity price (gold/oil)
Commodity prices have a close relationship with the US dollars as most commodity trade are
done through the US dollars. Commodity prices have an inverse relationship with the US
dollar as commodity prices increase in the US dollars, demand will decrease thus causing the


dollar to depreciate. Meanwhile, this indicates that prices of other currency will appreciate.
Thus, it is a good indicator to look at while evaluating future performance of the foreign
exchange market
The World Bank predicted that commodity prices will increase overall in 2018 due to
rising geopolitical tensions, overall upward price momentum as well as the OPEC agreement
to cut oil supply. Thus, this will undoubted cause the US dollar to depreciate overall in the
near future.

Figure 16: Commodity prices index (Retrieved from World Bank Data)

2.7 Official intervention
Official intervention can greatly effect the currency of these countries especially China and
Vietnam as both countries’ governments still directly manage their currencies. In addition,
government can also influence the exchange rate through fiscal policy as interest rate play a
direct role in influencing investment and demand for one country’s currency.

Recent changes in the exchange rates have prompted the Vietnamese government to limit


the VND devaluation to a minimum and let the VND recover to a similar point to what is was
at the end of 2017 to stabilize trade (Reuters).

For China, its government recent focus of tightening the credit risk has given rise to investor
confidence. Their government has set a focus on reforming its economy once more to
transition from fast growth to more stable growth with a focus on high technology and a
stable credit rating. This will elevate the Chinese economy to become a more stable,
developed economy as opposed to its current status as a developing nation. This will
increase confidence in investors, domestic confidence, interest rates as well as maintain low
inflation. All of these are factors which can directly influence the currency exchange rate.

2.8 Summary
In conclusion, the Chinese Yuan and the Vietnamese Dong will both appreciate
against the US dollar, although at a very small rate. Despite increasing interest rates in the
US, its high inflation will detract investors. Meanwhile, ease in trade tensions will cause
speculative behaviors to bring up the VND and the CNY. In addition, the strength in exports
in both Vietnam and China is another indication for both currencies to recover from its
recent depreciation as it is vital for their trade stability. This recovery is an opportunity for
the bank to gain from. Nonetheless, this is still a very volatile situation and must be treaded
carefully in order to gain from the CNY and the VND appreciation.

III.

Trading Strategy
The major objective of our FX trading plan for the upcoming period is to take
advantage of the current situation to earn the company optimal profit while managing
closely to the risks associated to our FX transactions. From the research and market analysis,
we forecast that over the next 6 month, the USD would depreciate against both the CNY and
the VND; to achieve the aforementioned goal, our plan is to go long for the CNY and go short
for USD in the beginning of the period. Such strategy can pose some risks regarding liquidity
issue, as USD is the most liquid currency, shortage in this currency can lead to many
problems in the future. However, with China being the one of the top foreign investor for
Vietnam in 2017, we also believe that there is always a demand for CNY in the Vietnamese
market, and holding CNY would not hold major risks. But to minimize the risks imposed,


before setting the daily quotes, VCB need to take into deep consideration the availability of
both the VND and USD currently in the bank.

Moreover, due to the high volatility of the FX markets and the currency prices, we
recommend that for every quarter we should end with a square balance for security; this
would prevent the company from exposing to high risks as the longer it takes for a business
to square their position the higher the possibility that the currency will perform off-track
from our initial expectation. To avoid major losses, our suggested plan consists of trading in
small amount as well as squaring off as soon as possible, should there be any unfavorable
events leading to a rapid decrease in the currency we are holding.

1. Trading strategy for USD/CNY bid/offer
For the next six months, as our research suggests, the USD would depreciate against
the CNY From the beginning of the period, we plan to use the USD to buy CNY when the
USD/CNY rate is highest, and sell CNY for USD later to earn profit and square our position.

In order to do so speedily and effectively, our exchange rate for USD/CNY needs to be
adjusted to attract more investors to sell their CNY; more specifically, we have to move our
quotes to the left. By decreasing both the bid and the offer quotes up to 3 pips allowing room
for us to adjust in accordance to the market demand, we, as the price makers, would
discourage people from selling USD and they would be more willing to buy USD as our offer
is lower than that of the market.
it is recommended to move the quotes to the left - reduce both the bid and offer
quotes by 3 pips, which enables us to go flexible with the market demand. Consumers are
expected to buy USD instead of selling USD since we offer a more reasonable one from the
market.
Our target sellers are corporates and firms, specifically those who export their
product to China. Because these firms tend to be long in CNY, especially after the first half of
the 2018, and are looking forward to squaring their position as soon as possible. After which
we can readjust our bid/offer in accordance to the response we get from the sellers.
Corporates and firms are our target sellers, especially those export their products to
China, since these firms aim to square their position as fast as possible with a tendency to be


long in Chinese Yuan, especially after the first two quarters of 2018. Then we would adjust
our bid and offer suitably based on what we get from the sellers response.

Preferably, should the demand for USD is high, we can increase our bid/offer close to
the market price rate to minimize cost and maximize profit. On the other hand, if the
opposite happens, we can slowly decrease our bids down to another 2 pips to encourage
people to sell CNY for USD, but that should be the limit and the bank should not go any lower
than that.
If the USD attracts higher demand, we would raise our bid/offer closer to the market
price real figure to reduce the cost and optimize our profit. In the case that the demand for
US dollar is low, we would gradually decrease our bids down by 2 pips with a view to

encouraging investors to sell CNY for USD.

After that, until the end of the first three months, our main aim is to sell off the CNY we have
acquired initially, slowly and steadily so as not to exposing ourselves to major risks. Up until
this time, we would move our quotes back to the right; to encourage people to sell the USD
and buy CNY, it is needed that we increase both the bid and offer quotes for USD/CNY, this
would attract the attention of Chinese Investor in Vietnam to sell USD for CNY, because we
are bidding them a more attractive price for the USD than the market average.

After the first quarter, we would sell off the CNY profit we gained with a steady degree in
order not to face with unexpected risks. We would move back our quotes to the right:
raising both the bid and offer quotes for USD/CNY, which drives people to sell USD and buy
CNY, as we bid them an attractive USD price compared to the market.

If the market behaves in the way that we have expected, after 6 months, we would earn a
total profit of CNY 3,771,700. The proposed interest below is extracted from Thomson
Reuters Eikon.

We expect to generate a total profit of CNY … after conducting our above plan.
The detail of the execution of our plan will be illustrated in details in the tables below:


Month

USD in million

Position

1

Sell 7

-7

Down 7

2

Buy 5

-2

Down 2

3

Buy 2

0

Square

Table 1: Trading Position for VCB from September to November – 2018

Month

USD

CNY

Rate USD/CNY

1

(7,000,000)

48,424,600

6.9178

2

5,000,000

(32,100,000)

6.8200

3

2,000,000

(12,620,400)

6.8102

3,704,200
Table 2: Profit and Loss Statement from FX Trading activities from September to November –
2018.
For the next 3 months, we expect that the depreciation rate of CNY against USD would slow

down substantially, to minimize the risk, in this period using the same strategy as above, we
would only look forward to sell USD 3 million initially, and the details are illustrated as the
table below.
Month

USD in million

Position

1

Sell 3

-3

Down 3

2

Buy 2

-1

Down 1

3

Buy 1

0

Square

Table 3: Trading Position for VCB from December 2018 to February 2019.

Month

USD

CNY

Rate USD/CNY

1

(3,000,000)

20,351,100

6.7837

2

2,000,000

(13,533,600)

6.7668

3

1,000,000

(6,750,000)

6.7500

67,500
Table 4: Profit and Loss Statement from FX Trading activities from December 2018 to
February 2019.

Risk Management Plan:


We are well aware of the volatility of the FX market and how unstable the exchange
rates are, especially the USD/CNY pair due to the current unstable economics condition from
the trade war between two countries. Our recommendation to cope is to square the
position immediately, should the following conditions apply:

The USD/CNY rates decreases considerably faster than our expectation and after reaching a
bottom (the lowest we suspected is 6.8102 for the first three months and 6.75 for the latter)
and starts to increase again (our benchmark is 50 pips from the bottom benchmark). We
should close the deal immediately and square our position to secure the benefit.
The USD/CNY rates increases due to unfavorable conditions such as new tariffs imposed on
China, or other macroeconomics factors, which surpass our 200 pips of loss anticipated; we
should sell of our CNY for USD to minimize potential losses.

From the beginning of September, we expect that the USD/CNY rates would still increases
slightly due to the lag effect of the new tariff imposed by President Trump on China. For the
first half of September, we would recommend divided the initial USD 7 million and sell it in

smaller amount every two days, keeping a close eye on the interest rate; as soon as the
USD/CNY rates starts decreasing we would sell of the entire remaining USD for CNY.

Moreover, as the exchange rates fluctuate constantly, while dealing with the sellers or the
buyers, VCB needs to be well aware of the changes in the exchange rate before the deal can
be closed; for the most favorable rate for our company, we are required to keep a close look
on changes in exchange rate in a timely matters as well as closing our deal as soon as
possible to prevent unwanted outcomes. To minimize this risk, we suggest that VCB should
do transaction with domestics firms and corporations in order to close the deal as fast as
possible.

Another risk management plan we would like to propose is to utilize many other currencies
such as Euro, AUD, or VND, etc. to acquire the initial needed figure for CNY and at the end to
buy back USD. In this way, the impact of a sudden depreciation of CNY or an appreciation of
USD would be softened. Because investing a great deal of money in just one currency pair is
extremely dangerous and sharing that risk for many other pair of currency would be a much


safer option, therefore we would not at a high risk of losing a lot of money. Moreover this
plan would minimize the liquidity risk; we would not be at stake of not having enough USD
for operation.

2. Trading Strategy for USD/VND.
According to our research and the speculation extracted from Thomson Reuters Eikon,
the USD would only slightly depreciate against VND. Moreover, due to the high instability of
the Vietnamese Currency, we do not recommend going long for VND and go short for USD
for any longer than the end of 2018.

For the last quarter of 2018, to increase the demand for USD and attract people to sell VND,
we move our quotes to the left, by decreasing both the bid and offer quotes we would again

encourage people to buy USD and sell VND. And latter on moving toward the end of the
2018, we would move the quotes to the right, we are now bidding higher than the market
price to promote people to sell VND, giving us the opportunity to buy back the USD and
square our position. Using the same model that applies for the trading strategy of USD/CNY,
but as we suspect that the gain from the USD/VND pair (at 90 pips) is much lower in
comparison to USD/CNY (over 1000 pips), we only suggest beginning the trading with selling
USD 4 million.

For the first two month of 2019, to secure our profit, our recommendation is that we would
only earn profit based on the spread of the bid and offer, and squaring our position daily as
the exchange rate for USD/VND tends to fluctuates greatly and the VND can depreciate at
any time. Should the exchange pattern follow our expectation, after the first three months,
an addition profit of VND 802 million can be earned.
Month

USD in million

Position

1

Sell 4

-4

Down 4

2

Buy 3

-1

Down 1

3

Buy 1

0

Square

Table 5: Trading Position for VCB from September to November – 2018


Month

USD

VND

Rate USD/VND

1

(4,000,000)

92,788,000,000

23,197

2

3,000,000

(68,997,000,000)

22,999

3

1,000,000

(22,989,000,000)

22,989

802,000,000
Table 6: Profit and Loss Statement from FX Trading activities from September to November –
2018.
Risk Management Plan:
Our maximum profit we anticipated from this trading deal is around 90 pips, should
the rates decreases in our favor and reaches this level, we would square of immediately.

As the VND is relatively unstable and is expected to depreciate against USD at any moment,
if the USD/VND increases by 40 pips, we would recommend squaring off the position
instantly to prevent further losses.

IV.

Conclusion
After our research conducted on the past performance of USD/CNY and USD/VND as
well as analyzing other macroeconomics factors such as inflation rate, interest rate, growth
rate, interventions, commodity prices, we have finally come to our conclusion that during
the next 6 months, the USD would depreciated against both the CNY and VND; however we
are more confident about the appreciation of the CNY so we suggest to go long for CNY for
the period and square our position at the end to maximize profit. If the FX market behaves
according to our expectation, after 6 months we would earn a total profit of CNY 3,771,700
and VND 802,000,000. Still, there is much volatility in the FX trading market and VCB has to
keep a close observation on the fluctuating exchange rate and react immediately to prevent
unwanted outcome.

V.

Appendix

Speculated Exchange Rate for USD/CNY and USD/VND (Retrieved from Thomson Reuters


Eikon)

VI.

References

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