I.

Literature Review
1.

Over view of Finnacial risk management (FRM)

According to the International standards of the Institute of Internal

Auditors (IIA), definition of risk is the possibility that events may
occur and will affect the achievement of the companys objectives.
Risks are assesed based on the impact and likelihood to occur.
In businesses, risk management is the central issue of corporate
governance

and effective

strategic

management.

If the

risk

management system is established with appropriate structure in the

enterprise system from the process of identification, assessment,
decision-making to respond and synthesize information of the
opportunities and threats affecting the achievement of objectives of the
business, this is called financial risk management or FRM.
For most businesses, financial risk management considers the
positive and negative aspects of risks. In other words, risk management
is used to assess the opportunities that can bring benefits to the
enterprise (positive impact) as well as manage those risks that may
have adverse effects on the business (negative impact). Whether it is a
multinational company and its exposure to exchange rate changes, a
transportation company and the price of fuel, or a highly leveraged
company and its interest rate exposure, the manner and extent of
managing such risks have always played a major role in the success or
failure of a business.
So it could be argued that financial risk management is one of the
most important corporate functions as it contributes to the realization
of the companys primary goal stockholder wealth maximization. The
chart below shows the main financial risks that a company may have to
cope with, and in this report, we mainly concern about the market risks
that may arise:

financial
risk

market
risk

interest
risk

currency
risk

credit
risk

commod
ity risk

foreign
investme
nt risk

assetbacked
risk

liquidity
risk

equity
risk

Therefore, in financial risk management, the use of derivative

instruments is considerably important for most businesses. Here, we
will go into some of the contents of several types of derivative
instruments.
Derivative instruments ( derivatives ) are securities whose value is
determined based on market prices and interest rates of the different
types of underlying asset.
They are instruments issued on the basis of these tools such as
stocks, bonds, aimed at many different target: risk diversification,
profit protection or loss reduction, to name a few. The derivatives will
be leveraged, which increases several times the value of the object of
investment such as stocks, bonds, or to ensure that if the prices of
stocks, bonds change, how much the price of derivative instruments
will still be maintained at initial levels. The market can be divided into
two types, which are exchange-traded derivatives and over-the-counter
derivatives. The legal nature of these products is very different, as well
as the way they are traded, though many market participants are active
in both. Today the market fluctuates every second and the enterprises

other
risks

may meet a variety of financial risks, the holding of derivative

instruments is a wise measure to cope with these risks.
The derivative instruments are diversified, but there are four basic
types: forward contracts (forward), futures contracts (futures), option to
buy or sell (options) and swap contracts (swaps).
1. Forward contracts: These are simplest of all derivatives and
hence one can start with forward at first instance. A forward contract is
simply an agreement to buy or sell at a price specified at a future date.
2. Futures contract: Futures contracts are no different from
forward contracts as they serve the same purpose. The main difference
between a forward and a futures is that futures are standardized
contracts whereas forward is tailor-made. Another important difference
is that the method of operation of futures is different.
3. Swaps: Swaps implies an exchange. Swap contract is an
agreement to exchange two streams of cash flow over a period of time.
4. Options: Options give a right, but not an obligation to buy or
sell something at a futures date. Thus, one may (or may not) use the
option agreement.
The derivative securities and futures, options are often complex
and fluctuating in nature, but the investment opportunities are useful.
Futures are obligations to buy or sell a particular commodity,
such as cereals, gold or Treasury bonds in one day according to a
previously established price.
Options are the right to sell or buy a specific item or certain
goods, such as: stocks, precious metal or Treasury bonds according to a
previously established price in a certain period of time.
2. Overview of US Steel Corporation
1. Introduction
"Companies that want to be competitive in an increasingly global
marketplace must have a global outlook and presence. U. S. Steel
continually looks for opportunities to strengthen our existing

presence in the global arena and strives to meet and set worldclassed standards in everything we do. "
United States Steel Corporation, headquartered in Pittsburgh, Pa., is an
integrated steel producer with its major production operations located in North
America and Central Europe and an annual raw steelmaking capability of 24.4
million net tons. The products of company include a wide range of value-added
steel sheet and tubular products from the automotive, appliance, container to
industrial machinery, construction, and so on.
U. S. Steel has constructed four research and development in favor of
advancing the boundaries of steelmaking and also developed tubular operations
in both Canada and United State. The company also maintains tubular products
sales offices in Denver, Co., Dallas and Houston, Texas, and Calgary, Alberta
Canada.
Follow the schedule of expanding the network and scale to all over the
world, since 2007, U. S. Steel has purchased many related-field companies that
boost the value and capacity for company such as: the purchase of Dallas,
Texas-based welded tubular products maker Lone Star Technologies, Inc. and
its related companies in June which makes it become the largest tubular goods
producer in North America (2.8 million net tons annual capacity) or acquiring
Canadas Stelco Inc., known as U. S. Steel Canada now.

Figure 1. Valuation of U.S. Steel Corporation compared to its peers

Source: Steel Insight

Figure 2. Steel market share in US and Canada

U. S. Steels operations are efficient and high tech, and the companys
customer focus is intense. U. S. Steel has been making steel for more than 110

years, always with an eye to serving customers needs in the most cost-effective
ways possible.
At U. S. Steel, creating value for the companys stakeholders is a priority.
To ensure the companys long-term success, it aims to build value for
customers, employees, shareholders, creditors, and the communities in which it
operates.
In addition, U.S. Steel is a large steel supplier all over the world and has
been trading with many countries overseas, it has to cope with many possible
risks such as: commodity risk, exchange rate risk and interest rate risk so
financial risk management is really a matter of concern for the company. In
order to pursue that target, U.S. Steel should make use of the derivative
instruments to hedge against the risks in its business as well as minimize the
loss that the company may have to suffer. Therefore, risk management and
especially, the derivatives methods are extremely crucial to the U.S. Steel
Corporations business today.
US Steel corporations exportation to Viet Nam
America is a large supply of raw materials such as: rare iron ore and steel,
uranium, tin, copper to Viet Nam. This is one of the potential markets for Viet
Nam, with diversified products to select, purchase and the competitive price to
serve the production needs of Vietnam.

Source: SEAISI

Asia in general and Vietnam in particular, has a sound trading relationship

and is a potential export market for the U.S. Steel Corporation, the proportion
of exported fine steel export from U.S. Steel Corporation to Vietnam has been
constantly increasing over the years. In recent years, U.S. Steel Corporation has
moved the direction to the area of Asia where has a fast pace of development
and a huge demand for construction products and Vietnam is one of potential
exported market for the company in the field of raw materials such as: rare
iron ore and steel, uranium, tin, copper. The co-operation with POSCO to
expand the business activities in Viet Nam recently has been considered as the
first step, however, it also has to face with the increasing competitiveness from
China market with the amount of cheap steel imported for less shipping fee and
low-paid labor.
Therefore, US Steel Corporation should develop and regularly update
information systems and promote the exchange of information with domestic
and overseas market with customers, research and grasp the financial capacity
and business profile of foreign trading partners. Furthermore, it should also

focus more on managing risks that may arise in its business by using
derivatives in the market so that it can not only maintain the leading steel
exportation position to Viet Nam in particular and in Asia in general, but also
get high profit as well.
In this report, we will give a few cases and analyze the methods in which
US Steel corporation use some derivative measures to hedge against financial
risk while exporting steel to Vietnam. We look forward to receiving your
comments and recommendations to acquire more knowledge and experience in
the future.

Introduction

To get a sound and stable position in the Viet Nam market of

importing the raw materiasl such as rare iron ore, steel and copper
while facing the pressure from the high competitiveness of China
companies with cheap and good quality suply,

US

Steel Corporation

has conducted a strategy to cooperate with one of the best and high
reputation firm for import and export raw materials: POMINA steel
Corporation, a leading steel manufacturer in Viet nam (annual
turnover reaches 4,000,000 million VND) for a contract of exporing
steel to Viet nam in June 2015 with the value of contract worth
thousand US dollars. Futhermore, they are also engaged in some
approaches or financial derivative tools to hedge the risk of volatility
of CAD and USD such as futuress contract, option contract and
currency swap. In this report, we will analyze how the U.S Steel can
actively use derivatives in financial risk management as well as
possible scenarioes that the firm has to encounter by following main
sections:
-

Section 1: Literature review

Section 2: Risk analysis

Section 3: Application of derivative instruments in hedging risk

for the company

Conclusion

For firms like US Steel Corporation, there is a wide variety of financial risk,
including market risk, credit risk, insurance risk, and liquidity risk in their daily
business. As discussed above, an obvious trend for firms in various geographic
regions and industrial sectors to hedge their financial risk is through the
derivatives. With the growing trend, more and more of those risks have arose,
the use of derivatives in risk management is the most effective for the current
multi-national enterprises.
Change in the international business environment and the increased
volatility of interest rates, foreign exchange rate movements have profound
implications on the way in which international companies deal with their
financial risks, as in the U.S. Steels exportation to Viet Nam hereby. These
risks can not only affect U.S. Steels quarterly profits, but they can determine
the companys survival. The management of these risks has become paramount
for the survival of companies in todays volatile financial markets.
The derivatives market is very dynamic and quickly developing into the
most important segment of the financial market. The derivatives market
functions very well and is constantly improving. As in our report, we analyzed
some cases when U.S. Steel could use futures, options, swaps contracts to cope
with commodity price risk, interest rate risk and exchange rate risk, and thanks
to those derivative instruments U.S. Steel might partially offset the loss in
inventory value when steels price falls or evade risk from variation of
exchange rate of USD and CAD, to name a few. Those derivative instruments
effectively fulfilled economic functions of price efficiency and risk allocation.
The competitive landscape has been especially active in Europe, which has
seen numerous market entries in the last decades.
All in all, derivatives play an important role in financial risk management in
markets today and companies can choose the most suitable type of derivatives
to hedge against their firms specific risks. Safety, transparency, and operational

efficiency could be enhanced along with proven and successful models helping
the global derivatives market to become even safer and more efficient.