VIETNAM NATIONAL UNIVERSITY – HO CHI MINH CITY

INTERNATIONAL UNIVERSITY
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REPORT
TOPIC:

VIETNAM’S DERIVATIVES MARKET

Course: Financial Institutions and Markets

Lecturer: Vo Thi Quy

Group: 3

Group’s members: Điều Trọng Khang – BAFNIU20013

Nguyễn Lan Hoàng My – BAFNIU20075

Ngô Dĩnh Thăng – BAFNIU20105

Nguyễn Chính Đông - BAFNIU18254

 TABLE OF CONTENTS

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I. Introduction to Derivatives
2
1. Definition
2
2. Uses
2
II. Derivatives in Vietnam
2
1. Types of Derivatives
4
2. Derivatives in Centralized and Decentralized
markets
9
III. Derivatives market size in Vietnam
References 11

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*Note: Derivative securities in this paper solely involves financial derivatives.

I. Introduction to Derivatives
1. Definition
A derivative is a security whose value is based on the value of one or more underlying
assets. An underlying asset can take many forms, such as stocks, bonds, commodities,
currency, interest rates, or market indexes. Derivative securities generally involve a contract
between two parties to exchange a standard quantity of an asset at a predetermined price
and at a specified date in the future.
Derivatives involve the buying and selling, or transference of risk. As the value of the
underlying assets changes, the value of the derivatives changes. Under normal
circumstances, trading in derivatives should not adversely affect the economic system
because it allows individuals who want to bear the risk to take more risk while allowing
individuals who want to avoid risk to transfer that risk elsewhere. However, derivative
traders can experience large losses if the price of the underlying asset moves against them
significantly.
Derivative securities markets are the markets in which derivative securities trade.

2. Uses
Derivatives have 2 main uses:
a. Speculation
Some individuals and institutions enter a derivative contract in order to earn a leveraged
rate of return. In this case, they use derivatives to acquire risk in order to speculate on the
value of the underlying assets.
b. Hedging
Derivatives are sometimes used to reduce the risk associated with positions or commitments
in the line of business. In other words, derivatives are used to protect the owners against the
risk of an adverse move in an asset.
Hedging is a way to reduce risk and limit loss. Meanwhile, speculation involves a significant
amount of risk for the investors to achieve fast profits.

II. Derivatives in Vietnam

1. Types of Derivatives
4 main types of Derivatives in Vietnam: Forward, Futures, Covered Warrants and Swaps.
a. Forward
A forward is a contract to buy or sell a certain quantity or unit of the underlying asset in the
future, at a specified price at the time of entering into the contract. There is no need to
standardize the terms, value, and volume of the underlying asset for a forward contract. An
investor can close a position by taking a reverse position on the same contract but only when

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the forward contract expires. Forward contract doesn’t require the investors to make a
deposit to ensure mandatory payment obligations.
b. Futures
A futures contract is a standardized contract between a seller and a buyer for the transaction
of an underlying asset at a specified time in the future for a predetermined price. A futures
contract has standardized terms and is traded on an exchange, where prices are settled daily
until the end of the contract. An investor can close a position anytime dủing the contract,
which will help the investors to be flexible in using their capital. Futures contract requires
the investors to make a deposit to ensure mandatory payment obligations. The contract’s
price of a future contract is adjusted each day as the price of the asset underlying the futures
contract changes and as the contract approaches expiration. As a result, marking futures
contracts to market ensures that both parties to the futures contract maintain sufficient funds
in their account to guarantee the eventual payoff when the contract matures.
c. Covered Warrants (CW)
A covered warrant is a type of warrant where the issuer is a financial institution rather than
an individual company and offers the right, but not the obligation, to buy or sell an asset at a
specified price on or before a specified date. The trading price of each warrant is usually
low, so when participating, investors only have to spend a small amount of money. CW is
listed on the Stock Exchange as securities, investors can use the securities trading account to
buy/sell warrants. Trading time, orders, order matching methods, pricing principles,
payment operations are similar to those of stocks and standardized by the Stock Exchange.
When participating in CW trading, investors do not have to deposit any money, can even
call or place warrants. To protect investors, the Securities and Exchange Commission has
specific regulations on conditions for stocks to become underlying securities, as well as
conditions for securities companies to be allowed to issue CWs.
d. Swaps
Swap is an agreement between two parties to exchange a series of cash flows for a specific
period of time at a specified interval. Like forward, futures, and option contracts, swaps
allow firms to better manage their interest rate, foreign exchange, and credit risks.
A plain vanilla interest rate swap is an exchange of fixed-interest payments for floating-
interest payments by two counterparties. In this type of exchange, no principal is exchanged.
The swap buyer makes the fixed-rate payments in an interest rate swap transaction while
the swap seller makes the floating-rate payments in an interest rate swap transaction.
Another type of Swaps is a currency swap - a swap used to hedge against exchange rate risk
from mismatched currencies on assets and liabilities. It is usually associated with borrowing
money when because a company wants to obtain foreign currency loans at a better interest
rate than borrowing directly in a foreign market. The exchanges can be at a fixed or a
variable rate of interest as negotiated in the contract, but it is required that the exchanges
occur at a known currency exchange rate.
Swaps are not standardized contracts because swap transactions are generally
heterogeneous in terms of maturities, indexes used to determine payments, and timing of
payments. Unlike futures and options markets, because commercial banks were the major
swap dealers.

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 2. Derivatives in Centralized and Decentralized markets
Since its inception in 2017, Vietnam's stock market has 7 securities companies that are
derivatives trading members of HNX and clearing members of VSD. Up to now, the number
of securities companies performing derivatives brokerage operations has increased to 23
companies. The top brokerage market shares of securities companies that dominate the
derivatives market from 2017 to 2021 are summarized in the charts below.

Source: Vietstock.vn

a. Centralized market
On August 10, 2017, the VN30 index futures contract derivative product was formally
launched in Vietnam's derivatives market. With this event, Vietnam has become the fifth

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country in the ASEAN region to have a derivative stock market, joining Singapore,
Malaysia, Indonesia, and Thailand, and the 42nd country in the world to have a high-level
financial market.
A 5-year government bond futures contract was introduced to the derivatives market on
July 4, 2019. On June 28, 2021, a third product, a 10-year government bond futures contract,
was added, bringing the total number of derivative products listed to three; however, the
following two products are not accessible to individual investors.
Besides the VN30 index futures contract and government bond futures contract, another
derivatives product is also being traded in the centralized market, which is the Covered
Warrant (CW). A covered warrant is a type of warrant where the issuer is a financial
institution rather than an individual company (for example, in VN, we have securities
companies issuing such as VNDIRECT, SSI, VPS, MBS, HSC, etc.) and offers the right, but
not the obligation, to buy or sell an asset at a specified price on or before a specified date. In
2019, CWs began trading. Until 2021, 134 CWs are exchanged in the market, up from only 10
CWs when the market first opened. As of August 2020, the total volume traded was 990
million CWs, worth VND1.48 trillion. This product offered investors an opportunity to
invest in potential stocks with high leverage
Example for CW trading in Vietnam:
You buy 1,000 call warrants to buy the VNM stock with the following information:

Conversation ratio 5:1

Exercise price 150,000 VND

Current price of VNM (underlying) 145,000 VND

Duration 6 months

Warrant price 1,000 VND

The total money you spend on this deal = 1,000 CW * 1,000 VND = 1,000,000 VND
- After three months:
Assuming that the market price of VNM is 155,000 VND, the market warrant price is 1,500
VND. You can sell your warrants on the Stock Exchange to take profit.
Your profit = 1,000 CW x (1,500 VND - 1,000 VND) = 500,000 VND
- On expiry date:
Assuming that you hold the warrant till the expiry date and the calculated and announced
settlement price of VNM is 165,000 VND.
The issuer shall pay you: 1,000/5 * (165,000 VND – 150,000 VND) = 3,000,000 VND
Your profit = 3,000,000 VND - 1,000,000 VND (the initial cost for CW) = 2,000,000

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Nevertheless, if the calculated and announced settlement price of VNM is lower than or
equal to 150,000 VND (exercise price) -> The differential of the settlement price and the
exercise price is lower or equal to 0 VND. Your warrants will not be exercised and you will
lose your money invested in the warrants (1,000,000 VND).
Participants: Personal investors, institutional investors
Example for Future contract VN30 index:
An investor enters a long position and buys a futures contract on the VN30 index with the
price of 1,000 points. According to the multiplier of 100,000 VND/point, the contract value is
up to 100,000,000 VND. However, investors only need to deposit 15%, which is 15 million
VND, to be able to trade this contract.
When the contract price increases from 1,000 points to 1,005 points, investors are profitable
with a value of 500,000 VND, the margin value increases to 15.5 million VND.
If trading in the underlying market, the percentage of profit compared to the initial deposit
will only be: 500,000/100mil x 100% = 0.5%.
Meanwhile, with the futures contract, the percentage of profit investors receive is up to:
500,000/15mil x 100% = 33.3%.
Participants: Personal investors, institutional investors

Vietnam's derivatives market in the first four months of the year 2022.
The Hanoi Stock Exchange (HNX) recently revealed that liquidity in the derivatives market
surged by 56.68 percent in April 2022 compared to March.
In particular, transactions on the futures market grew significantly in April 2022 compared
to the previous month. The entire futures contract trading volume for the month was
4,053,391 contracts, with a nominal value of 591 trillion dongs. The average monthly futures
trading volume was 202,670 contracts/session, up 56.68 percent from the previous month,
and the average trading value was VND 29.55 trillion, up 53.15 percent from the previous
month.
The VN30 index declined 5.53 percent from the previous month, ending the month at
1,417.31 points. Meanwhile, the VN30 futures contract product trade surged dramatically,
with the average trading volume reaching 202,601 contracts/session, a 56.63 percent raise,
and the average transaction value in terms of contracts reaching 29,483 billion VND, a 52.77
percent increase over the previous month. The trading volume on April 26, 2022, was the
highest at 394,782 contracts. This session also had the largest trade volume since the
beginning of 2022.
As of April 29, 2022, the open interest volume (OI) was 30,315 contracts, a 5.16 percent
decrease from the previous month. The greatest open interest volume in the month was
50,878 contracts on April 20, 2022, which is also the biggest open interest since the beginning
of the year thus far.
Notably, international investor transactions dropped in April 2022 compared to March,
accounting for 2.53 percent of the total market trading volume.

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In terms of government bond futures contracts, the average trading volume reached 68.2
contracts/session, with the average nominal trading value reaching VND 73.1 billion/session.
Domestic and international organizations carry out all transactions. At the end of April 2022,
the open interest volume is 0 contracts.
The number of derivative trading accounts increased in comparison to the previous month.
The number of derivative trading accounts reached 973,155 at the end of April 2022, a 4.7
percent raise over the previous month.

Source: vneconomy.vn

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 b. Decentralized market (OTC)
In Vietnam, forwards and swaps have not been authorized to be traded in the Centralized
market.
FORWARDS
Forward contracts are used by businesses to reduce risk for their business in the future
because a forward contract will help a company to decide a fixed amount of income that a
business can earn (or costs that the business must pay) in the future, regardless of market
fluctuations. This is also useful when businesses use forward contracts to avoid fluctuations
and the risk of currency devaluation.
For Vietnam in particular, foreign exchange forward contracts are the most popular because
import-export companies, banks, and financial institutions all must hedge against the risk of
currency devaluation. In transactions on foreign exchange forward contracts, the underlying
asset here is the foreign currency and the forward price is the exchange rate between the two
currencies. The forward price is based on the agreement of two parties in a forward contract.
However, the agreed exchange rate must be within the limit of the current forward rate of
the State bank at the time of signing the contract. The difference when changing the
exchange rate is the fee that enterprises must bear. The Vietnamese financial market has not
yet put forward contracts into official trading on the commodity market or the stock market
because of the high risk that this type of contract offers.
Liquidity of a forward contract is quite poor: It is difficult for the parties to transfer their
positions in the contract before the maturity date. For example, a company cannot sell the
contract when it feels unprofitable or cannot cancel the contract when it is not profitable.
Other companies may see a disadvantage or no need for the underlying asset.
Moreover, there is a risk that one of the parties to the contract is unable to perform the
contract because there is no security intermediary (warrant (for example, the underlying
asset drops too sharply, causing too great a loss, the buyer may refuse to buy according to
contractual commitments)
SWAPS
Commercial and investment banks with high credit ratings are swap market makers,
providing both fixed and floating rate cash flows to their clients. The counterparties in a
typical swap are a company, bank, or investor on one side (the customer is a bank) and an
investment or commercial bank on the other. After a bank executes a swap, the bank
typically covers the swap through an inter-dealer broker and withholds a fee for setting up
the initial swap. If a swap is large, the dealer-to-dealer broker can arrange to sell it to several
counterparties, and the risk of the swap becomes more widespread. This is how banks
offering regular swaps eliminate the risk, or interest rate risk, associated with them. Initially,
interest rate swaps helped companies manage floating-rate debt by allowing them to pay a
fixed rate and receive floating-rate payments. This way, companies can attempt to pay at the
common fixed rate and receive payments that match their floating rate debt. (Some
companies have done the opposite - pay floating and receive fixed - to match their assets or
liabilities.) However, because swaps reflect market expectations of future interest rates
Futures and swaps have also become an attractive instrument for other fixed-income market
participants, including speculators, investors, and banks. For example, assume that PepsiCo

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needs to raise $75 million to acquire a competitor. In the US, they can borrow money at 3.5%
interest, but outside the US, they can borrow at only 3.2%. The benefit is that they will need
to issue bonds in a foreign currency, which can fluctuate based on interest rates in the home
country. PepsiCo may enter an interest rate swap for the life of the bond. Under the terms of
the agreement, PepsiCo will pay the partner 3.2% interest for the life of the bond. The
company will then exchange $75 million at the agreed exchange rate when the bonds mature
and avoid any risk of exchange rate fluctuations.
Like most non-government fixed-income investments, interest rate swaps involve two main
risks: interest rate risk and credit risk, known in the swap market as exposure risk. work.
Because actual interest rate movements do not always match expectations, swaps involve
interest rate risk. Simply put, the receiver (the counterparty receiving the fixed-rate payment
stream) gains a profit if interest rates fall and a loss if interest rates rise. In contrast, the
payer (fixed payment partner) profits if the rate rises and loses if the rate falls.
Swaps are also subject to counterparty credit risk: the possibility that the other party to the
contract defaults on its liability. This risk has been partially mitigated since the financial
crisis, with a large portion of swap contacts now being settled through central counterparties
(CCPs). However, the risk is still higher than investing in "risk-free" US Treasuries.

III. Derivatives market size in Vietnam

Over the past 4 years, the Vietnamese derivatives market has been put into operation and
has shown remarkable growth in trading volume and average trading volume over the
years.
Table: Statistics of transactions

Source: data collected from hnx.vn

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The size of the market capitalization tended to increase continuously in the period from
August 2017 to December 2020 from 3,636,015 billion VND, equivalent to 86.69% of GDP to
9,309,889 billion VND, equivalent to 149.94 % of GDP. This is an impressive number when
the 2 years were affected by the Covid-19 pandemic, but the market capitalization was still
going up.

Source: fia.org

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 References

- https://www.investopedia.com/terms/d/derivative.asp
- https://mof.gov.vn/webcenter/portal/vclvcstcen/pages_r/l/detailnews?dDocName=MOFUC
M207534
- https://vneconomy.vn/thang-4-so-luong-tai-khoan-giao-dich-phai-sinh-tang-4-7-so-voi-
thang-truoc.htm
- https://tapchitaichinh.vn/kinh-te-vi-mo/danh-gia-thuc-trang-chung-khoan-phai-sinh-
viet-nam-tiem-nang-va-nhung-han-che-347761.html

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