Evaluating Transaction Exposures and Hedging Solutions for Importing Steel at Construction and Materials Trading Joint Stock Company.

Topics: Foreign exchange market, Currency, Exchange rate Pages: 51 (15148 words) Published: September 16, 2013
[Tang Huynh Yen Phuong]


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 the accounts payable of CNT over the last five years.


[Tang Huynh Yen Phuong]


2. Determine which hedging tools are available for the company, and design a suitable hedging strategy for the company for the long-term. 2. Research objectives A company is subject to transaction exposure whenever there are receivables or payables in foreign currency denominations. The hedging concept in managing transaction exposure is to be able to reduce the risk from currency fluctuations. In the end, the research will be performed as an input for further improvement at CNT. According to that, the research objectives of this thesis are: 1. Acknowledgement of how CNT handle transaction exposure derived from the foreign exchange rate fluctuations of Vietnam dong against US dollar currency. 2. Study the hedging strategies available which CNT may possibly implement to reduce risks from the exchange rate fluctuations. 3. Provide alternative choices for CNT hedging strategies in managing transaction exposures. 3. Scope of the thesis The thesis aims to identify the effect of foreign exchange fluctuation on the profit of some Steel import contracts of Construction and Material Trading company. The timeframe of the study is limited to the last five years, starting with year 2006 and ending with year 2010, depending on the availability, and reliability of the data. In this thesis, the author only has allowance to show certain parts of information that was given by the company because it is confidential. The data are collected from the Import- Export sales department No.2 of CNT company, and focuses on Steel import contracts and relevant documents. The foreign exchange rate used in this thesis is the rate offered by Vietcombank, not the foreign exchange rate in the black market. It is assumed that the company can approach the US Dollar source at banks.


[Tang Huynh Yen Phuong]


4. Methodology The methodology used to accomplish the objective, is by doing a...
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