Group 3

1. 2. 3. 4. 5.

Members Tiu V Cao Hunh Nguyn Th Huyn Ngn L Sinh Nht H V Hnh Ngc N Chu Th Mai Phng

to manage the exchange rate risk in multinational corporation ?

Topic 3: How

A.Definition of multinational corporation

B.An example of multinational companies in VietNam

C.Measures to manage the exchange rate risk

D.Summary

A.Definition of multinational corporation

Multinational corporation , often abbreviated as MNC(Multinational corporation) or MNE (Multinational Enterprises),is the concept to production companies or service providers in at least two countries. The large multinational corporations have the budget exceeded the budget of many countries. Multinational companies can have great influence on international relations and the economy of the country. Multinational companies play an important role in globalize process.

B. An example of multinational companies in VietNam

1.

Petro Vietnam National PVN

2.

Military Telecom Corporation Viettel FPT Group

3.

4.

Hoang Anh Gia Lai Group

Dairy Products Joint Stock Company Vietnam Vinamilk

5.

6. International Business Machines Corporation

7. Coca-Cola Company

8. Microsoft Corporation

9. The Walt Disney Company

10. Rolex SA

C. Measures to manage exchange rate risk

Exchange rate risk is the risk arising from exchange rate fluctuations affect the expected value in the future. In general, any activity that generate transactions in any currency which also contains exchange rate risk. Multinational companies often have to endure exchange rate risk Exchange rate risk has often bring huge losses to the enterprise. Thats why measures to limit exchange rate risk is essential for business.

1. Using import and export contracts in parallel A method for hedging exchange rate risks by conducting both of export and import contract at the same time with same value.

Advantage: simple, effect, no fee (if enterprises have active in both of export and import). Disadvantage: hard to find two contracts of import and export with same time , same value

Export contract
Same time Same value

Import contract

Foreign currency increased. Domestic currency decreased

Foreign currency decreased. Domestic currency increased

Export surplus, import deficit

Export deficit, import surplus

The money of profit will replace for the loss

2. Using reserve fund

Bussiness

Profit $

Loss $

Reserve fund
Advantage: simple, no fee Disadvantage: hard to account , easy abuse to another work => waste money

3. Chosing payment money 3a. We can chose domestic money for payment. It will help enterprises manage exchange rate risk. However, importers and borrowers will benefit from using weak currency to payment, in contrast, exporters and lenders likely to be paid strong currency.

3b. Apply flexible (change) price: if the rate of payment currency increased, import and export prices will be controled to down, and if the rate of currency payment reduced, prices will be increased. Increasing or decreasing the rate of currency payment by mutual agreement Advantage:limited loss from exchange rate risk, investment to country which have weak currency will benefit for enterprises Disadvantage: need high competition.
Price of imports and exports decrease Exchange rate of currency payment Price of imports and exports increase

4. Applying risk-sharing provisions

Contract Exchange rate risk L o w Company A Agree -ment Company B High Choose another currency payment

Payment

Payment

Advantage: reduce costs and risks by payment Disadvantage: difficult to negotiate rate risk

5. Technical insurance contract

1.Bill with domestic currency

2.Strategy lead/lag

3.Netting

Push risk for partner

Not push risk for partner

Bill with domestic currency: manage exchange rate risk, but depends on buyer Strategy lead/lag: if currency payment decrease , exporters should delay payment (lag) , importers should accelerate payment (lead) and vice versa Netting: if foreign currency increases, the payment is foreign currency, foreign currency decreases, the payment is domestic currency

6. Using derivatives market

6a. Forward contract

Buyer (Bank or customer)

Agreement

Seller (Bank or customer)

Fixed future date Fixed rate Fixed amount

Terms of forward contracts can be agreed upon, negotiations between the parties. Only two parties participate in the signing, the price agreed upon by the two parties together. Only two parties to the contract, so each side depends only on the other party in performing the contract. When there is a price change on the spot market , risk will increase when party do not perform the contract.

6b. Future contract

Buyer Futures Exchanges Seller

Fixed time Fixed amount Changing price daily Deposit account

Only the price is agreed upon, each contract are set a certain amount of goods , delivery date and place of delivery are set specifically on the market, there is no negotiation between the two parties to the contract Futures contracts are re-paid daily, and are set, noting the market, so the profit and loss account are identified every day. To participate in the futures contract, there should be a deposit in your account and set the market to ensure compliance with the contract between the parties.

6c. Option contract + It is contract giving the right, but not the obligation to buy or sell underlying assets at a fixed price during a certain period of time. + Two types Options: - Call option: The owner of call option has the right to buy an asset at a certain price, at a certain time. - Put option : The owner of put option has the right to sell an asset at a certain price, at a certain time.

Long call option

Long put option

Short call option

Short put option

Forward contract Fixed future date Fixed rate Fixed amount Must do contract Term can be agreed

Future contract Fixed time Fixed amount Changing price daily Deposit account Must do contract Condition by future exchanges

Option contract Can do contract or not Fixed future date Fixed price Two types option: call and put

D.Summary
The use of derivative instruments in Vietnam at present limited by the level of international business, financial management officers in modern firms, especially small and medium sector are weak. The banks have not yet found ways to help customers quickly access this service. In short, the exchange rate risk has a large effect to the business results of enterprises. The problem is that business must timely capture, analyze the causes of exchange rate fluctuations, as well the expected rate, based on which selection of risk management solutions suitable rate, limited to minimum impact from exchange rate fluctuations, for stable growth target, its sustainability. These solutions are useful materials to help businesses perform effectively reduce risks of exchange rate fluctuations.

Gameshow
When the exchange rate of currency payment increase, and we use apply flexible price to manage exchange rate risk, what will happen to price of import and export?
No change B. Decrease C. Increase
A.

What is a problem that multinational corporation must be fact? A. Interest rate B. Tax C. Exchange rate risk

In 2010, what does MNC used forward contract? A. American Standard B. Unilever C. Coca-cola

Foreign currency increased, domestic currency decreased.How will export be changed? A. Surplus B. Deficit C. No change

Which bank use option contract first in VietNam? A. Sacombank B. Agribank C. Eximbank

What is the difference of forward contract and future contract? A. Agreement B. Exchange rate C. Amount of asset

Where is forward contract traded? A. Chicago Board of Trade (CBOT) B. Over the counter (OTC) C. London

The end Thanks for listening