FX risk insurance gloomy

Unlike what happened in the last year, by this time, the dong appreciated against US dollar. Taking full this advantage, “carry-trade” activity is appearing more and more. Reasonably, this will help the FX rate risk insurance market become brisker, but in fact, the market still remains gloomy.

According to Nguyen Thanh Son, investment specialist of Lien Viet Commercial Joint Stock Bank (LienVietBank), “carry-trade” is a speculation to earn benefit from the FX rate differences between two or more currencies.

To avoid this risk, foreign banks such as HSBC, CitiBank and domestic banks like Bank for Investment and Development of Vietnam (Bidv), Vietnam Commercial Joint Stock Bank for Foreign Trade (Vietcombank-VCB) launched derivative insurance products such as “Option”, “Future”, “Swap”, and “Forward”

Vo Dieu Thuy, Bidv’s capital specialist, said that business will be able to avoid risks on interest rate and FX rate when doing “carry-trade” activities if they join these derivative contracts.

Particularly, Bidv is launching two products to the market including “interest rate swap of one currency” and “cross-currency swap”

In fact, FX risk is a force majeure and during recent years, many Vietnamese enterprises like Song Gianh Cement Joint Stock Co, Pha Lai Thermo Power JSC and Hau Giang Pharmaceutical JSC have ever faced these risks.

Son said that risk insurance products are very useful for both sellers and buyers, but due to weak liquidity, this market is hard to develop.

Normally, FX risk insurance product must ensure for the insurance price balance of international market. Meanwhile, the dong is not a convertible currency so banks offering these products are not completely confident and believe that the FX fluctuations always follow the upward trend without going the opposite tendency.

In addition, there are a few sellers and buyers so there is a difference between supply and demand. Besides, the price of this “goods” does not reflect closely the market, making factors forming the market is blurring.

Additionally, it seems to be sure when selling this insurance product, banks always offer too high price as for enterprises.

Another problem is that in 2009, normally, derivative method is to prevent FX risks and help enterprises stabilise business plans due to fluctuation of FX market, however, some banks and enterprises inked secrete deals using “Option right” to circumvent the law and trading foreign currency exceeding the State Bank of Vietnam (SBV)’s allowable ceiling FX rate.

Therefore, as of March 18, 2009, the central bank sterilised this specification in the market so far.

With above fact, if the central bank, commercial banks and enterprises do not work together, the fear is that the FX risk insurance market will exist in theory only.

TBKTVN

Tags: Vietnam finance, Vietnam financial, Vietnam foreign exchange, Vietnam insurance