Derivative Instruments and Hedging [chapter]

2018 The Moorad Choudhry Anthology  
Currently, the international economic transactions are regularly occurring. The statistics of imports and exports were published by the General Administration of Customs that the total turnover of the country's imports in year of 2012 was 228.37 billion U.S. dollars, increased by 12.1 % in comparison with the results of 2011. Thus, this is the 2nd year in a row total export and import turnover of Vietnam exceeded $ 200 billion. This result shows that the foreign currency transactions of Vietnam
more » ... economy are growing and exchange rates are regularly fluctuated in the foreign exchange market. The objective of the article is application of derivative instruments to hedge exchange rate fluctuation. From the data of actual economic events, the article uses the financial mathematical formulas to evaluate spot rate, forward rate, put and call options rate and finds out the results of the impact factors of exchange rate risk and the effectiveness of the application of derivative instruments for financial hedging. The research results show that the application of derivative instruments is necessary to minimize financial risk and how to bring high economic benefits? , © 2013 HRMARS 255 currency. If some industry groups depend on imported raw materials or foreign currency debt, they should apply derivative instruments for hedging exchange rate risk such as: the export and import companies, commercial banks, foreign currency business institutions etc. The majority of enterprises in this sector use foreign currency. The exchange rate increase has an impact on some sectors of imported materials or imported commodities such as: steel or on the companies who have a great debt ratio of dollars. On the contrary, this exchange rate increase brings benefit to the export companies. For the above reasons, the revenue and payment of foreign currency of the import and export companies depend on the agreed conditions of transactions. Because of exchange rate fluctuation, the value of Vietnam's export and import revenue is also fluctuated. So the companies need to engage in some hedging forms to minimize financial risk due to exchange rate fluctuation. Literature Review Khaldoun M. Al-Qaisi (2012) researched "The Dynamics of Foreign Exchange Rate Risk Management in Different Enterprises". This study was related to the foreign exchange management in companies with foreign transactions. The research studied the management measures in the Jordan Company and foreign exchange risk for its businesses. The research had made some questionnaire in order to collect data from a random sample. The volume of samples in this study was random samples of 120 firms and the samples were applied sampling techniques to select different sizes of businesses. At the same time, the research based on the samples to handle the issues of exchange rate risk. From the collected data, this study applied descriptive statistical model to assess the level of the exchange rate risk of some types of companies. The study of the diversity of legal forms is used by the companies. The study was aimed at providing information on the behavior of firms in the management of foreign exchange risk AI Wo ASAOLU Olufem had research in (2010) "Exchange Rate Risk Exposure of Nigerian Listed Firms". The author also used the sampling method of the company; the volume of samples was 117 PC from 1998 to 2007 and used descriptive statistical methods to find the slope of the regression equation. This result, the research assessed profit share on the exchange rate volatility and profit share had been used by the company. The study used three alternative currency rates of exchange. It was the U.S. dollar, British Pounds and the real exchange rate of Euro currency to find out the disadvantages of the use of three different currency types. This study also continued to study the differences in exposure to the financial companies and non-financial companies. However, the results of this research did not show any difference in risk prevention model between financial companies and non-financial companies to argue that financial firms should be hedging exchange risk. The study concluded that exchange rate stability was a significant obstacle for business operations in Nigeria listed companies. Andrei Tudor Stancu also studied the title (2010) "Impact of Foreign Exchange Risk on International Portfolios ". The purpose of this study was to illustrate the impact of foreign exchange risk in the international investment portfolio as well as variety of properties. This study was the approach of value at risk (VaR) model to calculate the error -covariance. The author's analyses were performed based on the relationship with VaR. The results of the study showed that currency fluctuation had a significant impact on the international portfolio and also showed that the unpredictable nature of the exchange rate is non-existent and their correlation with profit of foreign capital. In addition, the research had also established a general rule relating to currency risk which will be of great use when dealing with the hedging. M. Nihat Solakoglu and Nazmi Demir also had title "Exchange-Rate Exposure and the Financial Sector." The two authors showed in this study the sensitivity analysis of companies in the financial sector of Turkey with the exchange rate fluctuation by using a market model. This study also identified some specific elements of companies which only hedge the exchange rate according to statistical significance. This study used the logical binary model. The results of this study suggested hedging rate and the likelihood of hedging exchange increases. In addition, the authors also showed that the ROE was positive impact on banking and insurance sub-sectors.
doi:10.1002/9781118791752.ch2 fatcat:hnhxlyudnzcknlw3cp7edunybe