group assignment financial risk - class 2.5 (030412)

8/2/2019 Group Assignment Financial Risk - Class 2.5 (030412)

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University of Economics HCM City (UEH)

International School of Business (ISB)

Course: MBA

Financial risk management

March 25, 2012

Instructor: Vo Hong Duc

Class 2.5

1. Nguyn Hong Minh Tr

2. V Tin Dng

3. Phm Duy Hng

4. Phan Th Trn Nga

5. Nguyn Anh Thi


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PART A: MINI CASE STUDY

Question A.1

a. The rate that an importer will deal with the bank to buy at 1.015

b. The cost in the AUDs: 1,000,000 x 1.015= 1,015,000

Question A.2

The conception of the financial risk management relates to ABC Bank's outlook: Depend on situation

the company will have hedging appropriate. (Forward or put option)

- The interest rate: if a firm borrows money from bank while the Reserve Bank of Australia

increase interest rates substantially that impacts on increasing the interest rate of the firm. At

that time, the firm can stop lending from the bank or choose another option with the lowest

interest rate. When interest rate increase, Banks will face with the competition on interest rate

on banking systems, Bank with higher interest rate is more attractive and easier to get debt

financing from the market. Some small banks were faced with bankrupt due to they cannot get

money for operation. Under the impact on increasing interest rate, the increasing interest rate

of input material will lead to the increasing of interest rate of output material that means bad

debt from the bank will go up because the bank may not collect money from the company.

- Commodity price: when the Reserve Bank of Australia increases interest rates substantially,

the price of commodity will increase. Therefore, the company will pay more for material that

means the cost of company will increase.

- The exchange rate: when the AUD rises if the company has exported the products, the revenue

on AUD of company will decrease. If the company has imported the products, the cost on

AUD of company will decrease. Therefore, a firm can use suitable hedging tool (put option,

forward option, and future option or call option).

Question A.3

The exposures will this loan create both now and in the future:

- The interest rate: the difference between interest rate in USD and interest rate in AUD

now and in future will affect the cost of capital of company and influence the comparative of

company.

- The exchange rate: the difference between spot rate AUD/USD when the company brings

those funds back to Australia and future rate AUD/ USD ( when the company paying USD

interest rate annually for five years, at which time the loan will need to repaid) will affect the

cost of capital of company.

In this case, the company earns the difference between interest rate in USD and interestrate in AUD. In contrast, the company loses the difference between spot rate AUD/USD


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when the company bring those funds back to Australia and future rate AUD/ USD because

future rates are derived from interest rates. The future rate is based on the interest rate

differential between the two currencies before taking in to account credit spread.

If the company has export produces and received USD, the company still gets the

difference between interest rate in USD and interest rate in AUD. Besides, the company

does not lose the difference between spot rate AUD/USD when the company brings those

funds back to Australia and future rate AUD/ USD.

Question A.4

a. The 90-day forward AUD/USD exchange rate will be higher because we have known that any

changes in the exchange rate is offset a change in the interest rate differential in such a way as

to keep returns at the same level. The formula will illustrate for this scenario:

(1+rA) = Sfw/So x (1 + rn)

rA : interest rate in AUD

rn : interest rate in USD

Sfw : forward exchange rate

So : spot exchange rate

Therefore, when 90-day interest rate in AUD is higher than 90-day interest rate in USD, the

forward AUD/USD exchange rate will be higher than keeping returns at the same level.

b. The 90-day forward rate price is calculated as below:

Sfw= 1.0115 x (1+4%/4)/ (1+3%/4) = 1.0140

The 90- day forward price: 5000000 x 1.0140 = 5070000 AUD.

Question A.5

a. Regarding this scenario, the type of risk here is foreign exchange risk because the exchange

rate AUD/USD may be higher (payment with 6 months) than now. Therefore, the payment for

this contract will be increased due to the increasing cost of equipment and this lead to lose the

money for the company.

b. The impact on the company can have 2 options below if the AUD fell to AUD/USD of 0.9995

in 6-month time.

If the company did not decide hedging, the amount of AUD (the cost of equipment) would

be paid 1.999.000 (2mil x 0.9995).

Conversely, if the company decided hedging, the amount of AUD (the cost of equipment)would depend on the option company for hedging:


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- If the company chooses the forward exchange contract, the company must pay by

AUD depending on the rate AUD/USD on the forward contract.

- If the company had bought the call option, the company would pay the amount

AUD depending on the cost of the option.

In general, in both cases the amount AUD that the company must always pay (the cost of

equipment) higher if the company make a decision not to hedge.

c. The effective AUD cost of the equipment in each scenario calculated (assume the spot rate has

fallen to 0.9995 in 6 month time as below:

- The company left its currency exposure unhedged will be:

2.000.000 x 0.9995 = 1.999.000 AUD

- The company had entered into a forward exchange contract (FEC) at a rate AUD/USD of

1.0100.

2.000.000 x 1.0100 = 2020.000 AUD

- The company had bought an AUD put option (bought an USD call option) with the strike

price AUD/USD of 1.0102 and the cost of the option was 90 points.

2.000.000 x (0.9995 + 0.0090) = 2017.500 AUD

d. If the company wanted to protect against a fall in the AUD but still benefit if the AUD rose,

the company would buy an AUD put option (buy an USD call option).

Question A.6

a. When the company has bought an AUD call option (bought an USD put option) with a strike

of 0.9950, what the company would do if the AUD was trading at 1.0110 when the option

expires depends on option cost mentioned below:

- If (0.9950 + option cost) < 1.0110, the company will not exercise the option and

buy an AUD (sell an USD) in the spot market.

- If (0.9950 + option cost) > 1.0110, the company will exercised the option and buy

an AUD (sell an USD) to this option.

- If (0.9950 + option cost) = 1.0110, it depends on making a decision because it

brings the same profit.

b. Assuming the option cost 90 points: 0.9950 + 0.0090 = 1.0040 < 1.0110, the company will

not exercise this option and buy an AUD (sell an USD) in the spot market.

Question A.7:

Assuming we have two situations:

a. The sales department forecasts correctly:


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If the spot rate AUD/USD in 6 month time higher than 1.0095 (0.9999+0.0096) and we use

the AUD call option will get more profit than the FECs.

If the spot rate AUD/ USD in 6- month time lower than 1.0095 (0.9999+0.0096) and we use

the FECs will get more profit than the AUD call option.

b. The sales department forecasts wrongly (the real revenue lower than forecasting revenue):

We call the difference between forecast and real revenue is X and the spot rate AUD/ USD

in 6- month time is Y.

+ If Y 0.9999 we use the FECs will get more profit than the AUD call option and we can buy

amount X USD in the spot market then exercised the FECs.

+ If Y 1.0095 (0.9999+0.0096) we use the AUD call option will get more profit than the FECs.

We will not exercise the AUD call option and buy an AUD (sell an USD) in the spot rate market.

+ If 0.9999 < Y < 1.0095 (0.9999 +0.0096) which strategy gets more profit depending on value of

Y:

[(0.9999 x 3000000) X (Y- 0.9999)] compare with [(Y x 3000000)] [(0.0096 x 3000000)].

This shows that if Y fall will affect the strategy use FECs more effective than strategy use AUD call

option.

As analysis above, choosing a kind of strategy, this depends on an exchange rate AUD/USD in 6-

month time. In this case, we believed that value of the AUD might raise that means an exchange rate

AUD/ UAD will fall. Therefore, we should choose FECs.


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PART B: RESEARCH & RECOMMENDATION

Introduction

Every company in its business activities always faces many uncertain and unpredictable things

such as changes in exchange rates, interest rates, commodity prices, and so on, that can affect the

company dramatically. If these changes badly tends, they can put the company in problematic

situation. We can call the probability of loss is risk. Risk is the chance that unexpected outcome will

occur (Besley and Brigham, 2008, p.307), and risk is the probable variability of returns (Horcher,

2005, p.2). To do business or to invest is to face risks. Besley and Bringham (2008) stated, The

greater variability of the possible outcome, the riskier the investment (p.307), or simply as someone

said more rick more return.

Financial risk comes from many factors, it can occur in the processes of sales and purchases,

investments and loans, or it happens as a result of using financial tools such as debt financing or

financial leverage, or it comes from the activities of management, from the law and the regulations of

the government or the policies of the company.

Financial risk comes from everywhere and is unavoidable that any entrepreneur must face to

it. Therefore, identifying risks to control and set for an appropriate financial risk management strategy

takes a vital role to any business or any investor. In the limitation of this paper, we cannot cover all

kinds of risk with an ambition of giving out all solutions to all kinds of risk but it is intended to help

readers having a general view of what risks in business are and how to identify and manage financial

risk in reality.

Where is financial risk from?

According to Horcher (2005), there are three main sources of financial risk:

- Financial risks arising from an organizations exposure to changes in market prices, such as

interest rates, exchange rates, and commodity prices

- Financial risks arising from the actions of, and transactions with, other organizations such as

vendors, customers, and counterparties in derivatives transactions

- Financial risks resulting from internal actions or failures of the organization, particularly

people, processes, and systems.


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What is Financial Risk Management?

According to Horcher (2005), Financial risk management is a process to deal with the

uncertainties resulting from financial markets. It involves assessing the financial risks facing an

organization and developing management strategies consistent with internal priorities and policies.

Addressing financial risks proactively may provide an organization with a competitive advantage. It

also ensures that management, operational staff, stakeholders, and the board of directors are in

agreement on key issues of risk. (p.3)

The process of financial risk management includes steps, which are called financial risk cycle

as follow:

The process of financial risk management is continuous activities. According to Horcher

(2005), the process can be summarized as follows:

Identify and prioritize key financial risks.

Determine an appropriate level of risk tolerance.

Implement risk management strategy in accordance with policy.

Measure, report, monitor, and refine as needed.

To study what kinds of financial risk a firm can face and what is financial risk management in

reality, the group of researchers follows these steps to apply in a real corporation in Vietnam, named

Hung Vuong Corporation as a sample to research.

Some main features about the researched company

Hung Vuong was established in 2003 under the form of Limited Company. In 2007, due to

accomplish the scope in widening production and business a large, strong and professional

Corporation in producing and exporting Pangasius to meet the increasing demand about harder and

harder quality of market, Hung Vuong was transformed into HUNG VUONG CORPORATION.

Now, it owns the closed system from produce breed, feed to raising farm, processing, cold store, and

exporting. All of these create the high quality series of products from Pangasius, and then serve to the

consumers all over the world.

- The companys name: Hung Vuong Corporation.

- Abbreviated name: HV Corp. - Stock code : HVG

- Address: Block 44, My Tho Industrial Zone, Tien Giang Province, Vietnam.

- Email: [email protected] - Website : www.hungvuongpanga.com- Telephone: + 84 73 385 4245 - 385 4247 - Fax: + 84 73 385 4248

THE FINANCIALRISK MANAGEMENT CYCLE
mailto:[email protected]://www.hungvuongpanga.com/undefined/mailto:[email protected]://www.hungvuongpanga.com/undefined/


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- Representative office in Ho Chi Minh City:

+ Address: 144 Chau Van Liem St - Ward 11 - District 5 - Ho Chi Minh City - Viet nam.

+ Phone: +84 8 385 36052 - 3853 6330.

+ Fax: +84 8 385 36051

- Charter capital: 659,980,730,000.00 VND.

- The labour: more than 17,000 workers

- Business registration licence: No 5303000053; renewed the 8th time on June 21st, 2010.

Business sectors:

+ Aquaculture, processing, exporting seafood;

+ Production of feed (fish, domestic fowl);

+ Cold storage business;

Certificates of quality standard: Golbal Gap, HACCP, BRC, IFS, GMP, ISO 9001:2008, ISO

22000:2005, HALAL, ISO 17025...

Exporting market:

Hung Vuong is proud to be recognized as one of biggest processors and exporters of

pangasius in Viet Nam. At present, Hung Vuongs product is exported to 60 countries in the world

including Europe, Brazil, Mexico, Australia, the USA, Middle East and Asian countries. The chart

below shows that how big is each export market share.


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Source: Hung Vuongs Website: http://www.hungvuongpanga.com/en/our-market.html

Hung Vuong has gained many brilliant achievements from its exporting sales, and reached the

figure of USD 200 million revenue of exporting by 2011.

Source: Hung Vuongs Website : http://www.hungvuongpanga.com/en/our-market.html

Revenue and cost structure

- Revenue structure:

VND Billion

No. Items2009 2010 2011

Amount % Amount % Amount %

I. Revenue from main activities 3,087.28 94.66% 4,431.59 93,28% 7,835.25 97.00%

Revenue from export sales 2,375.29 72.83% 2,636.12 55,49% 4,728.24 58.53%

Revenue from local sales 660.54 20.25% 1,773.82 37,34% 3,050.03 37.76%

Revenue from cold store 51.46 1.58% 16.00 0,34% 9.46 0.12%

revenue from supplying services 0.00 0.00% 5.65 0,12% 47.53 0.59%II. Incom from Financial activities 165.00 5.06% 311.75 6,56% 187.46 2.32%

III. Incom from other activities 9.31 0.29% 7.63 0.16% 55.25 0.68%

Total: 3,261.59 100.00% 4,750.97 100.00% 8,077.97 100.00%

- Cost structure:

VND Billion

No. Items2009 2010 2011

Amount % Amount % Amount %

I. Cost of main activities 2,573.00 93,87% 3.822,88 92,33% 6.580,79 94,34%

Cost of export sales 1,496.80 54,61% 2.550,65 61,60% 3.887,62 55,73%


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Cost of local sales 1,053.78 38,45% 1.241,09 29,97% 2.624,99 37,63%

Cost of cold store 22.42 0,82% 27,89 0,67% 22,23 0,32%

Cost of supplying services 0.00 0,00% 3,25 0,08% 45,95 0,66%

II. Cost of Financial activities 165.00 6.02% 311,75 7,53% 347,76 4,99%

III. Cost of other activities 2.96 0.11% 5,85 0,14% 46,80 0,67%

Total: 2,740.96 100.00% 4.140,48 100,00% 6.975,35 100,00%

Source: Extracted from Financial statements of the company.

Identifying Financial risk of the Company and suggesting strategies for financial risk

management

As the above introduction, Hung Vuong group is known as one of the Vietnamese leading

corporations in seafood processing and exporting, especially in producing and exporting Pangasius.

They own the closed system from produce breeds, feed to raising farm, processing, cold store, and

exporting. All of these create the high quality series of products from Pangasius, and then serve to the

consumers all over the world. With these scopes, Hung Vuong Corporation could meet financial risks

as followings:

1. Market prices changes

Market prices changes are the first financial risk, which for most of processing and exportingCorporations meet. They include interest rates, exchange rates, and commodity prices. Hung Vuong

Group do not except, they also have experienced difficulties in fluctuation of domestic interest rates,

foreign exchange rates, especially FX rate of VND/USD, and Pangasius, shrimp price in domestic

and foreign market such as The United States of America, Europe, Japan.

- Interest rates: According to World Bank data (2012), lending interest rates in Vietnam

were not stable, and changed so much from 2008 to 2010. In January 2008, interest rate was 15.78%

per year, it yet decreased strongly in 2009 just 10.07%/year. Then, it gained but not much to 13.14%

in 2010 that released from report in 2011. According to Business Times (2011), lending interest rate

of VND increases so high reached to nearly 20% annual year. Then, the below chart will show the

changes of lending interest rates VND from 2008 -2011 clearly.


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Figure 1

Unit: Million VND

Source: Financial statement of Hung Vuong Group

Any business operates in the market bear influence by changes in interest rates. Hung Vuong

Corporation was also affected by these changes. In 2008, interest expense was 58 VND billion, and

up to 74 VND billions, meant up 27% in 2009. It yet was up dramatically to 193 VND billion and 266

VND billion in 2010 and 2011. Whereas, loans included both short term and long term, that increased

a little. In 2009, total loans ending balance was 1,633 VND billion (MLD) and it went up more 688

MLD than 2008, equivalent 73%. The situation reversed in 2010 and 2011, when total loans was up

40%, but interest rose 162%, and even loans just was up 8%, yet interest raised 37%. Therefore, the

main reason of paying high interest expense was the increasing interest rates so high. This is the first

risk caused from interest rate.

Content 2008 2009 2010 2011

Short - term Loans 927,222 1,548,377 2,171,551 2,337,239

Long - term Loans 18,000 84,870 63,113 26,915

Total loans 945,222 1,633,247 2,234,664 2,364,154

Difference Loans (+/_) 688,025 601,416 129,490

Difference Loans (%)

67% 40% 8%

Interest expense 58,231 74,139 194,308 265,719Difference interest expense (+/-) 15,908 120,169 71,410

Difference interest expense (%)27% 162% 37%

Equity1,498,805 1,758,134 1,858,517 2,052,873

Difference equity (+/-)259,329 100,382 194,356


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Risks rise from interest rate, when it is up, input cost will be up, which makes output cost up.

So these finished product price is high and will be difficult to compete to the same quality ones.

Besides, another risk generates from increasing interest rate, even when input cost does not go up, is

falling businesss profit.

Obviously, it was the interest rate growth, Hung Vuongs policy cut down the loans in 2010

and 2011 in their fund structure. Although the loans were up, the increasing just was small proportion.

To compensation for shortage fund, Hung Vuong increased equity such as issued common shares and

increasing retained earnings.

The other solution for declining interest expense is loan from foreign markets, which helps

this group get the benefit from low interest rate and much lower than domestic interest rate. When

making loans from these markets, the group also gets the profit from growth of foreign exchange rate

if foreign currency is appreciated. Then, Hung Vuong will get revenue from export to pay back the

loans. Therefore, this methods risk is limited.

Moreover, issuing the convertible bond is a good way to be used cheap-cost fund. Because the

interest rate of this type bond is lower than common bonds. Then, after period, the borrowing-fund

will be converted to common shares, or different states equity will increase. Thus, using this method

will receive benefit from both using low interest expense and rising equity. To carry out this, Hung

Vuong Group can do through their partner, SSI, the leading financial institution in Vietnam, the

largest securities firm in terms of market capitalization and listed on the Ho Chi Minh Stock

Exchange.

Foreign exchange rate: Foreign exchange rate is one of main factors cause financial risk that

an export firm like Hung Vuong Corporation has to face. Vietnam is a developing economy in the

Southeast Asia. In recent years, the nation has been rising as a leading agricultural exporter and an

attractive foreign investment destination. Vietnam's key products are rice, cashew nuts, black pepper,

coffee, tea, fishery products, and rubber. Manufacturing, information technology and high-tech

industries constitute a fast growing part of the economy. To Hung Vuong that is considered as a part

of contribution for our economy.

Looking at the diagram below, we can see exchange rate VND/USD changed a lot from 2008

to 2011.


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Foreign exchange rate VND/USD from 2008 2011

Resource: Bloomberg, Citi investment research and analysis

It moved up to the trend higher and higher in the next period. The main reason caused the

fluctuation of exchange rate was the financial crisis which started and has been happening from July

2008 until now. In that, the top exchange rates were in July 2008, October 2009, and December 2010.

Because of the instable felling of business and individuals when seeing the increasing USD in

international market, which made inspectors hoard USD. Addition, the demand USD for export

import enterprises to pay maturity liabilities was much too high and increasing USD to import gold

due to the large difference between inland gold price and international one.

With Hung Vuong Group, a specified processing and exporting pangasius enterprise, has been

affected by this changes. In 2009, total revenue was 3,087 VND billions, included 2,375 VND billion

of export, equivalent 77%, and this proportion declined to 60% in 2010 when total revenue 4,432

VND billion, in that amount for export was 2,636 VND billions. In 2011, total revenue went up nearly

double with 7,843 VND billions and revenue from export also grew up 4,779 VND billions, occupied

61% per total revenue. From this information, we can see export revenues proportion accounted for

the large part in Hung Vuongs total revenue. Therefore, when exchange rate VND/USD increased

continuously year by year that helped Hung vuong get benefit for export so much, but not profit, even

loose for import. This is the risk caused by exchange rate.

According to the state bank of Vietnam, the interbank average rate of VND versus USD at the

end of year from 2008 to 2011 as the following chart.


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Hung Vuong group is famous for not only processing and exporting seafood but also

aquaculture. Along with the upgrading of existing production lines and developing of new processing

plants, Hung Vuong Corporation currently operates more than 350 hectares of Pangasius farming in

many provinces of the MeKong Delta such as Tien Giang, Ben Tre, Vinh Long, Can Tho, SaDec,

Dong Thap, An Giang. In Hung Vuong's farms, the fish are only fed by the floating balls feed which

is high quality product from Hung Vuong - Tay Nam Join Stock Company and Viet Thang Join Stock

Company (www.hungvuongpanga.com). Due to the input to produce seafood feed is imported mainly

(SGTT, 2012), so when exchange rate went up, it meant growth of input cost because the importer

have to pay more VND for the same quantity and lead to cost of processing material up. Then the

cycle repeats as mentioned in interest rate.

In order to decrease pressure of raising input cost for manufacturing feed, Hung Vuong should

find out domestic material to replace or limit the import. Because seafood feeds are made mainly from

agricultural products that Viet Nam is agriculture country, producing them can do. If Hung Vuong can

conduct, they will fall down the dependence on foreign feed as well as reduce input cost of

processing.

Commodity selling price: This is important factor, which affects to the financial risk. As

mentioned in the introduction, Hung Vuongs major output markets are EU, Australia and America

which occupy 70% over total exporting value. However, the global financial crisis happened from

2008, especially in EU countries and America that made these regions pangasius demand has

dropped down and leaded to selling price fell. Hung Vuong exporter as well as famers producing

pangasius has many difficulties in finding to output market and the fund to re-production. At that

time, to solve this problem, Hung Vuong has found a new market and Japan is considered as a
http://www.hungvuongpanga.com/http://www.hungvuongpanga.com/


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potential market to replace the old ones. This is appreciated solution to untie the big problem, which

they are facing.

Inflation and commodity purchasing price: Vietnamese economy has rapid growth after

joining to WTO. Together with the economics growth, Vietnam is facing with high inflation 19% in

2011 and will be expected 10.5% in 2012 (World Bank data 2011). Following the inflation, input

materials went up and leading to result as the costing increased higher than the increase of selling

price, which caused difficulties to the company in competition.

At the present, the most of Seafood Companies have been facing with shortage of materials.

Directorate of Fisheries (2012), 80% food for fishery sector was supplied by the foreign companies

who are making high price together with the limited credit and high interest rate from the bank

making farmers go bankrupt, leading to the fishpond suspension in which farmers don't know when

they can start their breeding again. The main factor to set the high price on food is the high discount

policy (20% discount) from the food manufacturers to the supply agencies.

Hung Vuong is one of the biggest Seafood Company in Vietnam. Therefore, it has been also

suffering from above disadvantages. In order to lower the risk from commodities, the company should

have a closed relationship with the farmers who are feeding fishes to supply to the company by

signing long term contracts, and give previous financial supports to the farmers in order to force the

farmers sell the fishes to the company in return. By this way, the company can stabilize the input

material resources for the factories with stable prices.

2. Debtor risk:

As mentioned above, main markets of Hung Vuong are exportation including 40% of EU

market, 22% of Mexico & American markets, 8% of Middle East Market, and the rest is local market.

All export contracts through letter of credit (L/C) or TTR payments. Hung Vuongs revenue was

increased from 4,431,594 millions VND in 2010 to 7,792,024 millions VND in 2011 (+ 79.79%). Bad

debt was soaring increased from 15.404 millions VND in 2010 to 87.140 millions VND in 2011

(+465.70%) while the receivable account only increased +43.73% (from 1.567.597 millions VND to

2.253.048 millions VND). The big amount from bad debt came from foreign customers (83.716

millions VND, accounting for 96% per total bad debt). Hung Vuong has been facing with the debtor

risk from export operation. Therefore Hung Vuong has to consider about the new customers from

another countries out side Vietnam such as collecting detailed information from the new customers,

research the economy of each country, be carefully with Africa market, do not trust 100% to the

applicants banks in case of L/C payment. It is no meaning when the revenue went up and the bad

debt is rabid increase.


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When the market is so bad and the world is facing with financial crisis (2012), especially

European debt crisis. Hung Vuong has to consider about the liquidity from debtor firstly than profit.

3. Labor risk:

Hung Vuong is facing with the fluctuation of the labors about quality and quantity. The

workers are very limited in industrialized environment and ready to stop working as their like or

going to another company who pay a little high salary. The capacity produce is not stable so that

affects the delivery time.

Hung Vuong has to consider about salary policy reasonable in order to encourage the workers

work for the company long time and promote one's ability

4. Anti-dumping lawsuit risk:

Many fishery companies in Viet Nam are facing with the lawsuit of anti-dumping when

exporting Tra and Basa fish to EU and US markets. The same like that, Hung Vuong has suffered

antidumping duty from those countries which is either bad effected or threaten to Hung Vuongs

exporting operation. This is external risky, therefore Hung Vuong and Directorate of Fisheries has to

oppose strongly the antidumping tax application on those countries.

5. Financial leverage risk (FL risk)

Description 2008 2009 2010 2011

Liabilities 1,180,098 1,974,564 3,170,463 3,898,131

Equity 1,503,892 1,756,811 1,819,350 2,052,873

Financial leverage (FL) 1.78 2.12 2.74 2.90

ROE 48.36% 75.26% 12.77% 22.42%

Vinh Hoans FL 3.04 2.28 1.89 1.92

Minh Phus FL 2.36 2.01 3.13 4.08


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Base on the above data, Hung Vuong has strongly use financial leverage in 2011, increasing

from 1.18 in 2008 to 2.90 in 2011 while the ROE went down from 48.36 % to 22.42%, and the FL &

ROE trend will more fluctuate in the next coming years.

Hung Vuong has to control the expenses in order to lower the costing, trying to collect money

from receivable account (87.140 billions VND in 2011), and be carefully when using FL tool to

finance the capital in case the market went down or global crisis (2011).

6. Short term payment risk: (Millions VND)

Sources: http://www.hsx.vn/hsx/Uploaded/cttc_ctny

http://www.cophieu68.com/category_finance.php?quarter=4&year=2010&search=Xem

According to data listed above, the short term payment risks from Hung Vuong seem to be

safety when comparing with the average Index in the same filed. But Hung Vuong has to control the

bad debt from foreign customers.

7. Coefficient of Variance on ROA of Hung Vuong:

Decription 2008 2009 2010 2011 Notes

Description 2008 2009 2010 2011 AverageIndustrial

index

Turnover 2,985,865 3,087,283 4,432,490 7,792,023

COGS 2,265,623 2,567,863 3,812,928 6,580,794

Cash 79,989 106,943 206,931 303,638

Debtor/receivable account 1,455,252 1,453,579 2,238,051 2,724,919 1,967,950

Inventory 433,179 653,971 1,251,130 1,570,194 977,119

Short term investments 91,741 50,530

Current liabilities 1,160,284 1,294,976 3,084,034 3,839,618

Current ratio 1.78 1.71 1.20 1.21 1.47 1.91

Quick ratio 1.70 1.71 1.20 1.20 1.45 1.2

Cash ratio 0.07 0.08 0.07 0.08 0.07

Debtor days=360/(Turn over/Avr.

Receivable account)170 150 115 144.72

Inventorydays=

360/(COGS/average inventory)76 90 77 81.10
http://www.hsx.vn/hsx/Uploaded/cttc_ctnyhttp://www.cophieu68.com/category_finance.php?quarter=4&year=2010&search=Xemhttp://www.hsx.vn/hsx/Uploaded/cttc_ctnyhttp://www.cophieu68.com/category_finance.php?quarter=4&year=2010&search=Xem


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Net income 171,352 294,904 250,930 492,318

Assets 630,727 830,779 5,388,129 6,366,284

ROA 27.17% 35.50% 4.66% 7.73% 18.76%

Standard deviation 0.13Coefficient of Variance 0.69

The Coefficient of Variance from Hung Vuong when comparing with Minh Phu Seafood

Corporation (Minh Phu) and Vinh Hoan Corporation (Vinh Hoan) who are the top ten biggest

companies in seafood or fisheries sector. We have data as under:

Description Hung Vuong Minh Phu Vinh Hoan

AVERAGE ROA 18.76% 5.41% 12.27%

STANDARD DEVIATION 0.13 0.05 0.03

COEFFICIENT OF VARIATION

(CV)0.69 0.87 0.28

Base on the CV, Hung Vuong also have risk. When comparing with Vinh Hoan, Hung

Vuongs CV is bigger than Vinh Hoans CV. ROA dramatically decreased from 27.17% in 2008 to

7.73% in 2011 due to the increase of cost of goods sold (COGS) (+ 72.14%) and Administrative and

selling expenses (+42.51%) are bigger than the increase of Revenue (+75.83%).

Conclusion

Risk is living around the Companies that cannot either avoid or eliminate the risk. Companies

have to live with risks, high risk high return. The very important factor is to identify and manage the

risk in order to lower the risk. Hung Vuong is one of the top 10 th biggest exporting companies in

fishery sector therefore they suffered from fluctuation of the markets and also face with many kind of

risks as we mentioned above. Hung Vuong has to enhance the role of sections, which control the risk

such as financial department, department of internal risky control, etc. Those departments has to

analyses data or information from the market then feedback to another sections, hence Hung Vuong

can predict and indentify the risk in the future such as debtor risk, commodity risk, interest rate risk,

govern risk which is riskiness incurring in Hung Vuong.


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Financial risk management is not a contemporary issue.Financial risk management has been a challenge for as long asthere have been markets and price fluctuations.

Financial risks arise from an organizations exposure to financialmarkets, its transactions with others, and its reliance onprocesses, systems, and people.

To understand financial risks, it is useful to consider the factorsthat affect financial prices and rates, including interest rates,exchange rates, and commodities prices.

Since financial decisions are made by humans, a little financialhistory is useful in understanding the nature of financial risk.Risk management takes a vital part in the administration strategy of the company.Having good strategies The risk management process involves both internal and

externalanalysis. The first part of the process involves identifying and prioritizingthe financial risks facing an organization and understanding their relevance.It may be necessary to examine the organization and its products,management, customers, suppliers, competitors, pricing, industry trends,balance sheet structure, and position in the industry. It is also necessaryto consider stakeholders and their objectives and tolerance for risk.

group assignment financial risk - class 2.5 (030412)

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