Evaluating Transaction Exposures and Hedging Solutions for Importing Steel at Construction and Materials Trading Joint Stock Company.
[Tang Huynh Yen Phuong]
2011
PREFACE In the nature of international trade, many companies are exposed to the risk of exchange rate fluctuation. The purchases from international suppliers in other countries, and sales to domestic buyers with account payables and account receivables in different currencies will give rise to foreign exchange risks. 1. General problem statement In an effort to meet the demand of the Vietnamese building materials market, Construction and Materials Trading Company is involved greatly in the international trade. Profit from materials trading makes up approximately 75 percent of CNT‟s total profit. In CNT company, the imports of Steel such as Steel Beams, Steel Plate, Steel Sheet... often create account payables in foreign currency (US dollar) with the suppliers. The sales of these commodities often create account receivables in home currency (VND) with domestic buyers. Therefore, the company suffers from transaction risks during its steel trading process from the beginning of the purchase made until the payment is settled. According to CNT‟s management, the transaction exposure loss rarely happens, and is considered insignificant because the State Bank of Vietnam uses many mechanisms to support stability of the VND/USD exchange rate. Therefore, there were only minor transactions, which were hedged in the past. The hedging strategy used is only limited with the price decisions tool. However, it is a necessary task for the company to design a flexible hedging strategy with different hedging tools. A proper hedging strategy can help the company to deal with the risk of exchange rate volatility in different stages of the economic cycle. Thus, the research would like to analyze other currency hedging tools which are possible to implement at CNT company, and design a suitable hedging strategy for the company for the long-term. There are two aspects of the research problem: 1. The influences of Vietnam dong fluctuation against US dollar to
2011
PREFACE In the nature of international trade, many companies are exposed to the risk of exchange rate fluctuation. The purchases from international suppliers in other countries, and sales to domestic buyers with account payables and account receivables in different currencies will give rise to foreign exchange risks. 1. General problem statement In an effort to meet the demand of the Vietnamese building materials market, Construction and Materials Trading Company is involved greatly in the international trade. Profit from materials trading makes up approximately 75 percent of CNT‟s total profit. In CNT company, the imports of Steel such as Steel Beams, Steel Plate, Steel Sheet... often create account payables in foreign currency (US dollar) with the suppliers. The sales of these commodities often create account receivables in home currency (VND) with domestic buyers. Therefore, the company suffers from transaction risks during its steel trading process from the beginning of the purchase made until the payment is settled. According to CNT‟s management, the transaction exposure loss rarely happens, and is considered insignificant because the State Bank of Vietnam uses many mechanisms to support stability of the VND/USD exchange rate. Therefore, there were only minor transactions, which were hedged in the past. The hedging strategy used is only limited with the price decisions tool. However, it is a necessary task for the company to design a flexible hedging strategy with different hedging tools. A proper hedging strategy can help the company to deal with the risk of exchange rate volatility in different stages of the economic cycle. Thus, the research would like to analyze other currency hedging tools which are possible to implement at CNT company, and design a suitable hedging strategy for the company for the long-term. There are two aspects of the research problem: 1. The influences of Vietnam dong fluctuation against US dollar to