Risk management of exchange rate in forex trading case study of commercial banking system in ho chi minh city

MINISTRY OF EDUCATION
MINISTRY OFAND TRAINING
UNIVERSITY OF ECONOMICS HO CHI MINH CITY
UNIVERSITY OF

NGÔ TRẦN KIẾN QUỐC

RISK MANAGEMENT OF EXCHANGE RATE
IN FOREX TRADING
CASE STUDY OF COMMERCIAL BANKING SYSTEM
IN HO CHI MINH CITY

MASTER THESIS

Faculty of Banking
Ho Chi Minh City – 2010

2010


MINISTRY OF EDUCATION AND TRAINING
UNIVERSITY OF ECONOMICS HO CHI MINH CITY

NGÔ TRẦN KIẾN QUỐC

RISK MANAGEMENT OF EXCHANGE RATE
IN FOREX TRADING
CASE STUDY OF COMMERCIAL BANKING SYSTEM
IN HO CHI MINH CITY
MAJOR: BANKING AND FINANCE
MAJOR CODE: 60.31.12

MASTER THESIS
SUPERVISOR
Associate Professor Ph.D. TRẦN HUY HOÀNG

Faculty of Banking
Ho Chi Minh City

2010


RISK MANAGEMENT OF EXCHANGE RATE IN FOREX TRADING
A CASE STUDY OF COMMERCIAL BANKING SYSTEM
IN HO CHI MINH CITY
Certificate………..……………………………………….…..………………………………………………………………..…………i
Acknowledgement………………………………..………………………………………………………………….….…………i.
Abstract……….…………………………………………….…………………………………….…………………………….………… iii
Table of contents……………..………………………………………………………………….………….…….……………… iv
List of tables……………………………….…………………….…………………………………….……………..…………………v
List of graphs.………………………………………………………………………………………….…………….…….………….vi
Abbreviations………….……………………………….…….………………………………………………………………………vii
Chapter one: Introduction to the study…………………………………………………………………… 1
1.1 Rationale of the study…………………….……………………………………………………………………………… 2
1.2 Research problem………………………………………………………………………………………………..………… 3
1.3.1.1 Research questions…………………………………………………………………………………………… 3
1.3.1.2 Research objectives……………………………………………………………………………..…………. 3
1.3 Justification for the study…………………….…………………………………………………………...…………. 4
1.4 Research methodology………………..……………………………………………………………………..………… 4
1.5 Research subject and scope of the study……………………………..………………………..………..5
1.6 Significance of the study……………………… ……………………………………………………………..……….5

1.7 Structure of the study…………………. ………………………………………………………………………………….6
1.8 Limitations of the study………………………………………………………………………………………………….7
1.9 Conclusions …………………………………………………………………………………………………………………………8
Chapter two: Literature review……………………………………………………………………………………9
2.1 Introduction to the foreign exchange market……………………………………………………….10
2.1.1 Overview of establishment & development of forex market…………………….10
2.1.2 The Viet Nam foreign exchange market (VINAFOREX)……………….………….14
2.2 Exchange rate and risk management of exchange rate….….……….………….………18
2.2.1 Definition of exchange rate……………………………………..………………………….….……19
2.2.2 Classification of exchange rate.………………………………………………..………………..19
2.3 Types of foreign exchange transactions…………………………………………………………….….21
2.3.1 Spot transaction…………………………………………………………………….…………………………….21
2.3.2 Forward transaction…………………………………………………………….……………………….……21
2.3.3 Swap transaction…………………………………………………………………….……………………….…21


2.3.4 Future transaction…………………………………………………………………….………………….……22
2.3.5 Option transaction……………………………………………………………………………………………….22
2.4 Risk management of exchange rate…………………….…………………..……..…………………… 23
2.4.1 Definition of risk management of exchange rate……..………………………….23
2.4.2 Factors influence risk management of exchange rate………………………..24
2.4.3 Identification of exchange rate risk…….…..…………………………………………………26
2.4.4 Exchange rate risk analysis and measurement of banks…………………….28
2.4.5 Risk management of exchange rate with Long or short position in
net exposure…………………………………………………………………………..………………………………………………..29
2.4.6 Risk management of exchange rate with Long or Short position in
net total exposure…………………………….……………………………………………………………..……………........30
2.4.7 Classification of risks associated with foreign exchange operation.33
2.5 Legal foundations for spot transaction and derivative transaction..……………34
2.6 Conclusions………..…………………………………………………………………………………………………………….35

Chapter three: Research Methodology……………………………..…………………………….…….36
3.1 Introduction……………………………………………………………………………………………………………………….37
3.2 Research design ……………………………………………………………………………………………………………..38
3.3 Data collection………………………………………………………………………………………………………………….41
3.3.1 Document Collection…………………………………………….………………………………………… 42
3.3.2 Personal Interviews………………………………………………….……………………………………… 43
3.4 Data analysis…………………………………………………………………………………………………………………… 46
3.5 Conclusions……………………………………………………………………………………………………………………….48
Chapter four: The current situation of risk management of exchange rate
in foreign currency trading operation of commercial banking system in Ho
Chi Minh city…………………………………………………………………………..……………………………………..……50
4.1 Overview of commercial banking system in HCMC…………………………………………51
4.2 Overall assessment of money market and banking operations in HCMC…53
4.3 Overview of Forex operations of commercial banking system in HCMC.56
4.3.1 Foreign currency trading operation………………………………….…………….……….62
4.3.2 Experience of risk management of exchange rate from Vietnam
Bank for Agriculture and rural development’s transaction exposure……..………..64
4.3.3 Treasury organization and relation ship with other departments…66
4.3.4 Fluctuations of exchange rate USD/VND during year from 2007 to
2009………………………………………………………………………………………………………………………………………..……71


4.3.5 Factors affecting to risk management of exchange rate of
commercial banking system in HCMC………………………………………………………………………….75
4.3.6 Current risk management of exchange rate of commercial banking
system in HCMC…………………………………………………………………………………………………………………….76
4.4 The current application of derivative instruments for preventing exchange
rate risk of commercial banking system in HCMC……………………………………………………80
4.4.1 Forward transactions………..…………………………………………………….……………………….80
4.4.1.1 The current application of forward contracts of commercial

banking system in HCMC….…………………………………….…………………………..……………………………80
4.4.1.2 The current forward rate setting……………………………………………………………….82
4.4.1.3 Factors affecting to forward transactions of commercial banking
system in HCMC………………….……………………………………………………………………………………………....83
4.4.1.4 Conclusion…………….………………………………………………………….………………………………87
4.4.2 Currency option……………...………………………………………….…………………………..…………87
4.4.2.1 The current application of currency Option of commercial banking
system in HCMC……………………………………………………………………………………..…………………………….87
4.4.2.2 Option premium………………………………………………………………………………………………88
4.4.2.3 Conclusion……………………………….……………………………………………………………………….90
4.5 The evaluation of outcome performance on risk management of exchange
rate of commercial banking system in HCMC…………………………………………………………….90
4.5.1 Achievements………………………………………………………………………………………………………90
4.5.2 Shortcomings….……………………………………………………………………………………………………92
4.5.2.1 Shortcomings from SBV’s forex management policy………………………92
4.5.2.2 Shortcomings from commercial banking system in HCMC……………93
4.5.3 Causes…………….………………………………………………………………………………………………………96
4.5.3.1 From forex management policy of SBV……………….……………..….………….96
- No flexibility of exchange rate policy of SBV………………………………….…………..97
- Objects participating interbank forex market is limited and less efficient
intervention made by SBV ………………………………………………………………………………………..……..98
- Situation of high inflation and trade deficit …………………………………..……………...98
- Unsuitable regulation of forward rate setting…. ....……………………………………….98
- Lack of legal framework guiding for forward and option transactions.. 98
4.5.3.2 From commercial banking system in HCMC….….………………………………99
- Most of local commercial banks have not developed self-forex trading
yet and rarely use derivative instruments for hedging risk of exchange rate..99


- Possibility of increasing legal capital of commercial banking system in

HCMC is limited…………………………………………………………………………………………………………….………99
- In charge of combined responsibilities lead to lack of supervising and
checking trading limits, loss limit and forex report to SBV ……………………………….10
- Depending on option premium of foreign banks……….……………………………101
4.5.4 Conclusions….………………………….…………………………………………………………………….….101
Chapter five: Recommendations and Conclusions……………………………………………103
5.1 Introduction…………….………………………………………………………………………………………………….….104
5.2 Recommendations for improvement of risk management of exchange rate
of commercial banking system in HCMC………..………………………………………………………..104
5.2.1 Suggestions for State bank of Viet Nam……………………………………………………104
5.2.1.1 Improvement of spot market……………………………………………….………………...104
5.2.1.2 Strengthening regulation on forex position……………………………………….105
5.2.1.3 Adjusting regulation to forward rate setting………………………………………106
5.2.1.4 Establishment of option interbank market..……………………………………….107
5.2.2 Recommendations for commercial banking system in HCMC………….107
5.2.2.1 Building business strategies and customer policy.………………………….107
5.2.2.2 Standardizing structure and process of operational Treasury…….108
5.2.2.3 Improvement of modern equipments and information technologies
for treasury operation………………..……………………………………..…………………….…………………………109
5.2.2.4 Enhancing for training banking staffs to improve ability of
analyzing and forecasting fluctuations of exchange rate in forex operation…109
5.2.2.5 Diversifying types of foreign currencies in the international
trade…………………………………………………………………………………………………………………………………………..109
5.2.2.6 Strengthening the application of derivative instruments for
hedging risk of exchange rate…………………………………………………………………………………………110
5.3 Conclusions related to research questions………………………………………………………….110
5.4 Implication for further study…………………………………………………………………………………….112

References …………………………………..........................................................................viii
Appendices........................................................................................................ix

Survey results…..………………………………………………………………………………………………………………………..x


ABSTRACT
Viet Nam has emerged as a rapidly growing economy in the last few
years with the average growth rate of over 7% per year in which the banking
system has developed strongly and efficiently and play a crucial role as
connection between domestic and international financial market. However
with internal economic difficulties caused by high inflation, trade deficit and
issues of government policy and unfavorable changes in the world economy,
the banks, especially small and medium banks, have found obstacles on the
way to develop due to lack of management experience and approaching new
information technologies in banking field. The thesis examines a case study of
Commercial Banking System in Ho Chi Minh City to see the way they manage
their risk of exchange rate and how strong financial instruments are used to
prevent risk of exchange rate.
Objectives of the thesis are (1) to gain an understanding of risk
management of exchange rate in theory; (2) to approach the recent method of
risk management of exchange rate in foreign currency trading operation of
commercial banking system in HCMC and the real application of derivative
instruments for preventing risk of exchange rate of commercial banking
system in HCMC from 2007 to 2009; (3) to figure out practical issues to be
solved in risk management of exchange rate in foreign currency trading
operation; (4) to suggest some recommendations for improving risk
management of exchange rate of commercial banking system in HCMC.


In term of structure, the thesis has five chapters and begins by defining
the research problem which can be clarified by research questions and
research objectives. By using survey method in combination with sources of

secondary data of commercial banking system in HCMC for 2007 to 2009, the
research problems of risk management of exchange rate in foreign currency
trading operation of commercial banking system in HCMC have been
explored and highlighted by pointing out factors affecting to the current
method of risk management of exchange rate of CBS-HCMC. Some practical
issues of risk management of exchange rate of commercial banking system in
HCMC are pointed out in which achievements, shortcomings and causes are
investigated in order to raise some recommendations for improvement of risk
management of exchange rate in foreign currency trading operations of
commercial banking system in HCMC in particular.
The research study focus on risk management of exchange rate in foreign
currency trading operation of commercial banking system in HCMC by
controlling forex position and using solutions for preventing risk of exchange
rate on many types of forex transactions which include spot, forward, swap
and option transactions. Based on literature review, recent foreign exchange
regulations issued by State bank of Viet Nam and current situation of risk
management of exchange rate of CBS-HCMC, the research study hope for
contributing some general and specific recommendations for commercial
banking system in HCMC as well as practical forex market of Viet Nam in
long run.


THESIS RESULTS AND NEW POINTS

1/ The thesis provided interesting assessments on Vinaforex and forex
trading markets among commercial banking system in Ho Chi Minh city.
2/ The thesis looked at one of heatly-debated topics with a different focus on
the risk originated from the forex trading operation and the ways of
management of such risk.
3/ The study target is meaningful, both academically and practically.

4/ The thesis has covered a wide range of outstanding practical issues in the
area of foreign exchange risk and risk management in Viet Nam.
5/ The thesis adds at least 02 importance contributions to the literature as
follows:
- The thesis has reflected a number of perceptions on foreign exchange risk
and risk management from senior level of related authorities and bankers.
- The thesis has furnished evidence of the importance of the management of
foreign exchange risk (Bank for agriculture and rural development of Viet
Nam; Bank for foreign trade of Viet Nam’s experiences).
6/ The thesis also focus on the application of derivative instruments for
hedging risk of exchange rate in forex trading by adjusting regulations to
forward rate setting
The new points of forward rate setting as suggested are as follows:
+ Based on interest rates of deposit and loan of commercial banks,
forward rate are consistent with real condition of market and narrow the
difference between forward rate and spot rate at the same duration.
+ Buying and selling forward rate are defined specifically making
commercial banks comfortable to deal with customers and check it again.


CERTIFICATE
I, Ngo Tran Kien Quoc, assure that all contents and figures in this
research due to my study, survey and performance.

Ngo Tran Kien Quoc


ACKNOWLEDGEMENT
I would like to express my deep gratitude and warmest appreciation
to my research Supervisor, Dr. Tran Huy Hoang for his precious guidance,

share of experience, ceaseless encouragement and highly valuable
suggestions throughout the course of my research. I would like to thank to
many of my colleagues from SBV, who have helped me during the
collection of data as well as support me during doing research: Ms. Nguyen
Van Dung, Mr Nguyen Hoang Minh vice director, Mr Hoang Truong Giang,
Ms. Nguyen Ngoc Binh, and my friends from operational Treasury
departments of commercial banks in Ho Chi Minh city. My special
gratitude is extended to all instructors and staff at Faculty of Banking and
Postgraduate Faculty, University of Economics Ho Chi Minh City (UEH)
for their support and the valuable knowledge during my study in UEH. I
would also like to avail this opportunity to express my appreciation to
Professor Nguyen Dong Phong, UEH Board of Directors for creating MBA
program in English and Dr. Tran Ha Minh Quan for his support during the
course. Specially, my thanks go to Ms. Nguyen Thi Diem Thuy for her
valuable and enthusiastic support for this research study and for her
comments of English from early draft of my thesis. Last but not least, the
deepest and most sincere gratitude goes to my group of research for their
boundless support, abundant love and encouragement throughout my period
of study. I, therefore, dedicate this work as a gift to them all.


ABBREVIATION
HCMC

: Ho Chi Minh City

SBV

: State bank of Viet Nam

SBV-HCMC

: State bank of Viet Nam of Ho Chi Minh city

CBS-HCMC

: Commercial banking system of Ho Chi Minh City

CB-HCMC

: Commercial banks in Ho Chi Minh City

SOCBs

: State-owned commercial banks

JSCBs

: Joint-stock commercial bank

JVBs

: Joint venture banks

FBBr

: Foreign bank branches

FFOBs

: Fully foreign-owned banks

Sacombank

: Sai Gon Thuong Tin joint stock commercial bank

ACB

: Asia joint stock commercial bank

EAB

: East Asia joint stock commercial bank

EIB (Eximbank)

: Export and Import joint stock commercial bank

PNB

: Southern joint stock commercial bank

TCB

: Technical joint stock commercial bank

VAB

: Viet A joint stock commercial bank

HDB

: Housing development bank

OCB

: Oriented joint stock commercial bank

ABB

: An Binh joint stock commercial bank

VCB-HCM

: Bank for foreign trade of Viet Nam–HCMC


Vietinbank

: Viet Nam industrial & Commercial bank

Agribank

: Bank for Rural and Agriculture of Viet Nam

Forex (FX)

: Foreign exchange

ROA

: Return on Asset

ROE

: Return on Equity

NE

: Net exposure

NTE

: Net total exposure

VINAFOREX

: Viet Nam foreign exchange market

Interbank

: Intermediary bank

ATM

: Auto-machine

POS

: Post of Sale

WTO

: World Trade Organization

FED

: Federal reserve fund


LIST OF GRAPHS

Graph 4.1- Organization chart of credit institution system in HCMC………….52
Graph 4.2- The forex profit compared with income before tax of commercial
banks in HCMC from 2007 to 2009…………………………………………58
Graph 4.3- The forex profit breakdown by four types of commercial banks in
HCMC from 2007 to 2009……………………………………………….….59
Graph 4.4- Graph of Forex profit breakdown by Spot-Gold-Other of CBSHCMC from 2007 to 2009…………………………………………………..61
Graph 4.5- Forex profit column of Spot-Gold-Other breakdown by four types
of CBS-HCMC from 2007 to 2009…………………………………………………………………………….61
Gragh 4.6- Forex turnover breakdown by four types of CBS-HCMC from
2007 to 2009……………………………………………………………………………………………………………………….64
Gragh 4.7- Treasury Organization of VCB……………………………………………………………..68
Graph 4.8- Relationship between forex trading department and other
departments of VCB-HCMC…………………………………………………………………………………………71
Graph 4.9- The fluctuations of exchange rate of SBV, VCB and free market
between USD and VND during year 2007 to 2009………………………….74
Graph 4.10- Forward turnover compared with Forex turnover of CBS-HCMC
during 2007 to 2009………………………………………………………….82
Graph 4.11 Forward rate in term of 01 month, 2 months and 3 months

compared with spot rate of CBS in HCMC from 2007 to 2009………..……86
Graph 4.12 Research process.


LIST OF TABLES

Table 3.1- Questionnaire for interview……………………………………………………………………44
Table 4.1- Net work of credit institution in HCMC…………………..…………….…………52
Table 4.2- Data of total charter capital, total fund mobilization, total loan
outstanding and Profit & Loss statement of CBS-HCMC from 2008-2009.53
Table 4.3- Profits from foreign exchange operation of CBS-HCMC from
2007 to 2009………………………………………………………………………………………………………….58
Table 4.4- Profitability arising from Spot, Gold and Other transactions
breakdown by four types of CBS in HCMC from 2007 to 2009………………..…….60
Table 4.5- Forex turnover of commercial banks in HCMC from 2007 to
2009….………………………………………………………..………………………………………………………………………..63
Table 4.6- EURO/USD transactions and total losses of 28,3 million EURO at
Transaction office II of Agribank ……………………………………………………………………………..65
Table 4.7 : Growth rate of exchange rate USD/VND breakdown by three
types of SBV, VCB-TPHCM and free market from 2007 to 2009.....….…74
Table 4.8 : Report of position at the end of day from Asia bank………………………77
Table 4.9 : Growth rate of forward turnover of commercial banks in HCMC
from 1998 to 2009……………………………………………….…………………….81
Table 4.10 : Turnover of Forward buying and selling in comparison with total
forex turnover from 2007 to 2009 ………………………………………………………………………………81
Table 4.11- Forward rate and spot rate at the due date of forward contract
from year 2007-2009………………………………………………………………………………………………………..85


List of interviewees

No
1
2
3
4
5
6
7
8
9
10
11
12
13

Full name
Ho Huu Hanh
Nguyen Hoang Minh
Nguyen Van Dung
Hoang Truong Giang
Nguyen Duc Kien
Nguyen Thai Bao Han
Đào Hảo
Nguyen Khoa Dieu Anh
Nguyen Huy Cuong
Vu Quoc Van
Nguyen Duc Binh
Tran Huu Y
Nguyen Thi Ngoc Nga

Position
Director
Vice Director
Vice Director
Chief Forex Dept.
Chief General Dept.
Vice general Director
Director
Vice Director
Treasury Manager
Treasury Manager
Treasury Manager
Treasury Manager
Chief Inter.Dept.

Organization
SBV-HCMC
SBV-HCMC
SBV-HCMC
SBV-HCMC
SBV-HCMC
ACB
VCB-HCMC
VID Public bank
UOB-HCMC
Sacombank
Vietinbank
Southern bank
HDB

Risk management of exchange rate

CHAPTER I
INTRODUCTION TO THE STUDY

Supervisor : Associate Professor Ph.D Tran Huy Hoang

Page 1


Risk management of exchange rate
1.1 Rationale of the study
Viet Nam has gradually integrated into the global economy arena after
officially becoming a member of the world trade organization (WITCO) at the
end of year 2006. Together with the process of economy liberalization, the
priority of economic sectors is financial banking industry. This opportunity
help Viet Nam banks get favorable conditions in banking activities but also
face with a lot of pressure on competition. The economy liberalization leads to
liberalizing capital flows, interest rate and foreign exchange rate… The current
financial crisis clearly shows how complex financial market is and that risk
management of exchange rate will become more important to protect
commercial banks from damages or losses toward their foreign exchange
operation. Basically, most Viet Nam banks’ profit focus on credit operations
accounting for 70 - 75% of total income and not yet concern much about
preventing risk of exchange rate. Nowadays the fluctuations of exchange rate,
interest rate, gold price in international market have effected strongly to
domestic market creating many new types of financial derivative instruments
and investment funds which forced commercial banks to protect themselves by

using more hedging tools in foreign exchange operation; Therefore,
Vietnamese banks need to upgrade capacity of risk management, especially
risk of exchange rate that will be considered in this research study and
contribute some improvements for managing risk of exchange rate of
commercial banking system in Ho Chi Minh City (HCMC).
1.2 Research problem
Supervisor : Associate Professor Ph.D Tran Huy Hoang

Page 2


Risk management of exchange rate
The research problem mentioned in this research study is the risk
management of exchange rate in foreign currency trading operation of
commercial banking system in HCMC so that the research study needs to
investigate and describe the recent method risk management of exchange rate
of commercial Banking System in HCMC, then point out some practical issues
to be solved in and suggest recommendations for improving the current risk
management of exchange rate of commercial banking system in HCMC.
1.2.1 Research questions
The research study will answer for the following questions:
a. Why does the risk management of exchange rate of commercial
banks have to be considered and What are the factors affecting to risk
management of exchange rate?
b. What are the current method of risk management of exchange rate
and the practical issues to be solved in foreign currency trading operation of
commercial banking system in HCMC?
c. What are the recommendations for improvement of risk management
of exchange rate in foreign currency trading operation of commercial banking
system in HCMC?

1.2.2 Research Objectives
To finalize the research problem and answer the research questions
mentioned above, the research study has the following objectives:

Supervisor : Associate Professor Ph.D Tran Huy Hoang

Page 3


Risk management of exchange rate
a. To gain an understanding of risk management of exchange rate in
theory
b. To approach the recent method of risk management of exchange rate
and the real application of derivative instruments for preventing exchange rate
in foreign currency trading operation of commercial banking system in HCMC
from 2007 to 2009.
c. To figure out practical issues to be solved in risk management of
exchange rate in foreign currency trading operation of CBS-HCMC.
d. To suggest some recommendations for improving risk management of
exchange rate of commercial banking system in HCMC.
1.3 Research methods
The methods used in this research study are survey method and
secondary data method. Survey method is conducted by using primary data
through depth-interviews from banking experts of commercial banking system
and secondary data method is performed by using secondary sources of data
from banking magazines, annual reports of State bank of Viet Nam and a
number of Commercial Banking System’s report.
1.4 Justification for the study
Basically, Viet Nam banks have to scope with many level of risks in
foreign exchange operations such as exchange rate risk, interest rate risk,

liquidity risk, settlement risk, counterparty risk, operational risk, country risk
in which commercial banks are always facing with exchange rate risk. So the
Supervisor : Associate Professor Ph.D Tran Huy Hoang

Page 4


Risk management of exchange rate
goal of risk management is to protest banks from non-estimated damages due
to the fluctuation of those elements mentioned above in the international and
domestic market, reduce influences of sensitive market movements towards
the foreign exchange operations, strengthen the ability of competition for
banks. So far the risk management of exchange rate has strongly developed in
international financial markets. However, Viet Nam banks as well as
commercial banking system in HCMC are still unfamiliar with preventing
damages or losses from their foreign exchange operation. Therefore, the
research study aims at helping Viet Nam banks to recognize some practical
problems in risk management of exchange rate in foreign currency trading
operation in comparison with theory as well as foreign exchange regulations
of State bank of Viet Nam and get more experiences of risk management of
exchange rate to protect themselves from damages or losses due to
fluctuations of exchange rate.
1.5 Subjects and scope of the study
It is likely that the research study only focus on risk management of
exchange rate in foreign currency trading operation of commercial banking
system in HCMC for a period of three years from 2007 to 2009.
The research study will not analyze risk management of exchange rate
for gold trading operation, credit operations, fund mobilization, activities of
investment and other banking services.
1.6 Significant of the study

Supervisor : Associate Professor Ph.D Tran Huy Hoang

Page 5


Risk management of exchange rate
Finalizing research problem will provide some recommendations for
commercial banking system in HCMC to improve risk management of
exchange rate in foreign currency trading operation; to help commercial banks
in HCMC to identify , measure and control transaction exposures efficiently;
to upgrade the ability of risk management of exchange rate to create value by
maximizing the return for the level of risk that the banks are prepared to
accept.
1.7 Structure of the study: The research study consists of five chapters.
Chapter I reviews the rationale of the study, and presents research
problem, research methodology, subjects and scope of the study, significance
of the study.
Chapter II examines the background information of the foreign
exchange market, the characteristics and development of the Viet Nam
foreign exchange market. Especially, this chapter is also to review some
foreign exchange literature and methods of exchange rate risk management
used for commercial banks in theory to identify, analyze and measure risk of
exchange rate in foreign currency trading operation.
Chapter III is to describe, justify, and explain the research methodology
used in the study. The research process starts from problem definition, which
include exploratory research conducted to clarify ambiguous problems. After
identifying research problem, the research design must be developed. A
research design is a master plan specifying the methods and procedures for

Supervisor : Associate Professor Ph.D Tran Huy Hoang

Page 6


Risk management of exchange rate
collecting and analyzing the needed information to answer the research
questions outlined in chapter I.
Survey a real case of commercial Banking System in HCMC is
presented in chapter IV. This chapter presents descriptive findings of
exchange rate risk management practices. Objectives of this chapter are (1) to
observe the current situation of foreign exchange operation in foreign
currency trading operation of commercial Banking System in HCMC from
2007 to 2009 and the real application of derivative instruments for preventing
exchange rate of commercial banking system in HCMC, (2) to point out
practical issues to be solved in risk management of exchange rate (3) to
evaluate outcome performance of risk management of exchange rate risk of
commercial banking system in HCMC of which the highlights of
achievements, shortcomings as well as main causes effects to risk
management of exchange rate risk of commercial banks in HCMC.
Finally, chapter V will provide some conclusions and recommendations
for improving risk management of exchange rate of commercial banking
system in HCMC.
1.8 Limitations of the study
The foreign exchange market is one of complex financial market affected
by many economic factors in which Vietnamese bank is one of subjects
participating in the market and facing with many difficulties. Methods of risk
management of exchange rate mentioned in this research study mainly focus
on risks of exchange rate towards foreign currency trading operation of
Supervisor : Associate Professor Ph.D Tran Huy Hoang

Page 7


Risk management of exchange rate
commercial banking system without doing researching on interest rate risk,
liquidity risk, operational risk, country risk, legal risk.
To enhance risk management of exchange rate of commercial banking
system efficiently, the research study needs to learn more about the risk
management of exchange rate in relationship between foreign currency
trading operation and credit operation, capital mobilization as well as other
investment activities.
Due to the restrain of author’s experiences, the research study could not
solve all aspects of risk management of exchange rate that will continue to be
completed by other research.
1.9 Conclusion
The research problem of risk management of exchange rate in foreign
currency trading operation of commercial banking system will be explored and
clarified

to provide some recommendations for improvement of risk

management of exchange rate through practical issues pointed out in foreign
currency trading operation of commercial Banking System in HCMC.
The method of risk management of exchange rate of commercial banks
is more complicated than that of company because commercial banks have a
lot of forex transactions with many types of foreign currency and different
durations which create receivables and payables in foreign currency of
balance sheet of commercial bank. Therefore, the research study hopes for

Supervisor : Associate Professor Ph.D Tran Huy Hoang

Page 8


Risk management of exchange rate
contributing a part of solutions on risk management of exchange rate in
foreign currency trading operation of commercial banking system in HCMC.

Supervisor : Associate Professor Ph.D Tran Huy Hoang

Page 9