A Vietnamese company that raises US dollars at 7% but earns dong revenue is not really paying 7%. If the dong weakens against the dollar by 3% a year, the true cost of that foreign currency loan is closer to 10%, and a bad year can erase the entire project margin. Yet many boards approve offshore financing without a written hedging policy.
This article explains how to design a board-approved hedging policy for VND/USD exposure, how to choose between forwards, NDFs, swaps and options, and where Vietnamese regulation, accounting and tax create traps.
Table of Contents
- Why Currency Mismatch Is a Board-Level Risk
- Designing a Board-Approved Hedging Policy
- Instruments: Forwards, NDFs, Swaps and Options
- SBV Rules for Residents and Onshore Bank Counterparties
- VND Convertibility Limits and the NDF Market
- Hedge Accounting Under IFRS 9 and the VAS Gap
- Tax Treatment of FX Gains and Losses
- Covenants and ISDA Documentation Issues
- Frequently Asked Questions
Why Currency Mismatch Is a Board-Level Risk
Dollar debt is attractive because offshore pricing is usually lower than dong borrowing costs. The saving is real only if the borrower can service the debt without a currency loss. A hedging policy converts that question from an ad hoc treasury decision into a governed corporate process.
Where the exposure sits
Exposure is wider than the principal of a foreign borrowing. It includes interest and fees, bond coupons, amortisation schedules, capex payable in USD or EUR, and anticipated dollar receipts that are only forecast. A developer with dong sales and a dollar term loan, a manufacturer with dollar export income but dong costs, and an infrastructure sponsor with a dollar bond and a dong tariff each have a different risk shape. The hedging policy must map each one.
The cost of leaving it unhedged
The dong has been managed within a trading band by the State Bank of Vietnam (SBV) and has depreciated against the dollar in most recent years, with sharper moves in stress periods. Unhedged borrowers face three consequences: cash-flow strain at repayment, covenant breaches when leverage and interest cover are tested in dong terms, and accounting volatility that lenders and auditors read as weak governance. A short, well-drafted hedging policy is cheaper than any of these.
Designing a Board-Approved Hedging Policy
Lenders, auditors and, increasingly, bond investors ask a simple question: who decided how much currency risk this company may carry, and where is it written down? The board, not the treasurer, should own the answer. Under the Law on Enterprises 2020, the board of directors or members’ council oversees strategy and major financial decisions, so a hedging policy fits naturally as a board-approved document with defined delegations.
Objectives of the hedging policy
Start with purpose, because every hedging policy needs one. A sound hedging policy states that hedging protects cash flow and covenant headroom, not that it earns trading profit. It then sets a quantified risk appetite, for example the maximum acceptable annual FX loss as a percentage of EBITDA, or a minimum interest cover under a stressed exchange rate. Speculation and open proprietary positions should be expressly prohibited.
Governance and limits in a hedging policy
The hedging policy should separate roles: the board approves the framework; a risk or finance committee reviews exposure monthly; the CFO and treasury execute within limits; and an independent function, such as finance control or internal audit, confirms trades and reports exceptions. A hedging policy defines approved instruments, approved bank counterparties with credit limits, maximum tenor, authorised signatories, and a clear escalation path when a limit is breached. This is also the structure auditors expect under internal control standards.
Hedge ratios and tenor ladders
Most corporate borrowers build a layered approach into the hedging policy rather than a single full hedge. A typical policy might require 70% to 100% of contracted foreign debt service in the next 12 months to be hedged, stepping down to 40% to 70% for months 13 to 36, with discretion beyond. These numbers are illustrations only; the correct ratios depend on revenue currency, margin sensitivity and the cost of carry. The principle is that the hedging policy sets bands, and treasury operates inside them.
Instruments: Forwards, NDFs, Swaps and Options
Instrument selection is where a hedging policy becomes practical. Four products cover almost every Vietnamese corporate need. The table compares them on the points a board usually asks about.
| Instrument | What it does | Best used for | Main drawbacks in Vietnam |
|---|---|---|---|
| FX forward (onshore) | Fixes a future VND/USD rate for a single date | Known coupon, fee or capex payments within about 12 months | Limited tenor and bank appetite beyond one year; documentary support is required |
| Non-deliverable forward (offshore) | Cash-settles the difference between the agreed and fixing rate, with no physical dong delivery | Offshore-booked exposure where onshore forwards are unavailable | Regulatory eligibility for residents must be confirmed; basis risk against the onshore rate |
| Cross-currency swap | Exchanges principal and interest streams in two currencies over the life of the loan | Multi-year dollar loans and bonds, converting USD debt into synthetic VND debt | Credit lines, collateral and netting enforceability; long-dated pricing is expensive |
| FX option | Gives the right, not the obligation, to buy or sell at a strike rate | Uncertain exposures such as forecast export revenue or bid-stage projects | Upfront premium; thin onshore liquidity; accounting complexity |
Choosing between instruments
Every hedging policy should match the instrument to the certainty and length of the exposure. Forwards suit certain, short-dated flows. A cross-currency swap suits a five-year dollar term loan because it hedges principal and interest in one structure and removes the roll-over risk of stacking short forwards. Options suit uncertain flows, accepting a premium for protection with upside retained. A non-deliverable forward is a fallback, not a default, for the reasons discussed below.
Many policies also permit collars, which cap the premium by selling a second option.
Cost of carry and tenor mismatch
Because dong interest rates and dollar rates differ, forward points embed a carry cost that reduces the saving from borrowing in dollars. Under the hedging policy the board should see the all-in hedged cost, not the headline dollar margin, before approving a foreign borrowing. Hedges shorter than the loan leave a re-hedging risk at renewal, which the hedging policy should address by requiring a maximum unhedged gap.
SBV Rules for Residents and Onshore Bank Counterparties
Vietnam regulates foreign exchange under the Ordinance on Foreign Exchange 2005, as amended in 2013, with SBV circulars supplying the detail. Two regimes matter: the rules on foreign borrowing and the rules on derivative transactions.
Foreign borrowing registration
A Vietnamese enterprise that undertakes foreign borrowing without a government guarantee must follow the SBV registration regime. In practice, medium- and long-term loans (more than one year) are registered with the SBV, and short-term loans are registered when they are extended or otherwise convert to medium- or long-term. Funds are generally drawn and repaid through a designated foreign loan account at an authorised Vietnamese bank, and the loan must be used for permitted purposes.
The principal framework is Circular 03/2016/TT-NHNN, as amended; Circular 08/2023/TT-NHNN is also frequently cited in this area, and the borrower should verify the current consolidated position and its scope before relying on it. Offshore bond issues by companies are generally treated under the same foreign borrowing regime (verify the latest implementing rules).
For hedging, the registration matters in two ways. The registered terms define the exposure that the hedge must follow, and amendments to repayment schedules may require notification, so a restructured hedge and a restructured loan should move together.
Derivatives with onshore banks
Licensed Vietnamese credit institutions and foreign bank branches may offer FX forwards, swaps and options to customers within SBV rules on derivative transactions (verify the current circular, since the instruments and the conditions have been revised over time). Typically a bank will require evidence of a real underlying exposure, such as the loan agreement and its SBV registration, and will assess the customer’s credit before granting a line.
Onshore banks apply position limits to themselves, which affects the tenor and price they can offer. A corporate should treat the bank’s documentary request as a design input to the hedging policy, not as paperwork to be improvised.
A practical point: the hedge should be executed with a bank licensed to deal in FX derivatives with residents. A counterparty that is not licensed, or an offshore affiliate trading directly with a resident, raises compliance questions that should be cleared in advance.
VND Convertibility Limits and the NDF Market
The dong is not freely convertible. Capital transactions are controlled, onshore forward and swap markets are relatively shallow, and tenors beyond one to three years are hard to price. This is why a non-deliverable forward market developed offshore, in which parties settle in dollars against a published dong fixing without moving dong across the border.
For a Vietnamese resident, however, an offshore non-deliverable forward is not an automatic solution. Residents’ ability to enter offshore derivatives, and onshore banks’ ability to face offshore parties on a dong-linked basis, is restricted and should be treated as requiring legal clearance. The hedging policy should state that any non-deliverable forward is permitted only after written legal confirmation of the structure, the counterparty and the settlement route.
Even when clearance is obtained, basis risk remains: the offshore fixing can diverge from the rate at which the borrower actually buys dollars onshore, particularly in stressed markets.
Convertibility also affects the other end of the loan. The borrower must be able to purchase dollars at the time of repayment from an authorised bank, supported by documents. The hedging policy should require treasury to assess dollar availability, not just price, for large amortisations or bullet maturities.
Hedge Accounting Under IFRS 9 and the VAS Gap
A hedge that works economically can still create reported volatility. Under IFRS 9, hedge accounting allows a derivative’s gains and losses to be recognised in the same period as the hedged item, subject to formal designation, documentation of the risk-management objective, and an effectiveness assessment based on an economic relationship. The IFRS Foundation publishes the standard and its application guidance.
Vietnamese Accounting Standards (VAS) are different. VAS does not currently contain a comprehensive standard on financial instruments and derivatives, so there is no equivalent hedge accounting framework. Under the Ministry of Finance’s accounting regime for enterprises (Circular 200/2014/TT-BTC, as amended), period-end revaluation of foreign currency monetary items is recognised through the accounts as exchange differences, and derivative contracts are largely recorded under general principles.
The consequence is a mismatch: an unrealised revaluation loss on a dollar loan may be booked today, while the offsetting forward gain is reported later or not matched at all.
Vietnam has announced a roadmap for adopting IFRS (Decision 345/QD-BTC of 2020), with voluntary adoption first and mandatory application phased in for specified entity groups; the borrower should verify where it sits on the timeline. Practical steps now include:
- Documenting hedge relationships internally as if IFRS 9 applied, in case of group reporting, an IFRS conversion or a lender request.
- Preparing parallel IFRS 9 reporting packs if the parent or a bond investor requires them.
- Explaining expected VAS earnings volatility to the board and lenders before the hedge is executed.
- Testing covenant definitions against VAS accounts, as discussed below.
A hedging policy should therefore say which accounting basis governs hedge reporting and who is responsible for documentation. Without hedge accounting, a cross-currency swap that economically neutralises a loan can still produce quarterly profit swings that surprise the board.
Tax Treatment of FX Gains and Losses
Tax follows a different logic from accounting, and this is where an economically sound hedge can leave an unhedged tax cost. In general, Vietnamese corporate income tax rules distinguish realised exchange differences, arising on actual payment or conversion, from unrealised differences arising on period-end revaluation of monetary items.
Realised gains are normally taxable and realised losses are generally deductible if supported by valid documents; the treatment of unrealised differences at period end has special rules (see Circular 78/2014/TT-BTC and Circular 96/2015/TT-BTC, both as amended or replaced, and verify the current text, including the effect of the new Law on Corporate Income Tax taking effect from 2026).
Three issues deserve board attention:
- Timing mismatch. If an unrealised loss on the dollar liability is not deductible until it is realised, but the hedge gain is taxed when realised, the same economic position can create a timing difference.
- Interest limits. Under Decree 132/2020/ND-CP, net interest expense on related-party-linked borrowing is capped at 30% of EBITDA for deduction purposes. Whether and how FX differences and swap payments count toward financial expense should be confirmed with tax advisers.
- Withholding and documentation. Interest, fees and swap payments to non-resident counterparties may trigger foreign contractor tax or withholding questions, and the tax authority will expect contracts, confirmations and bank vouchers to be consistent.
The hedging policy should require a tax review before the first use of any new instrument and a periodic reconciliation between accounting and tax treatment. For structuring, see our tax advisory services.
Covenants and ISDA Documentation Issues
Lenders increasingly write hedging into the loan itself. Common provisions include an obligation to hedge a minimum percentage of the exposure, a restriction on speculative derivatives, a requirement that hedge counterparties be acceptable banks, and cross-default or acceleration if hedge termination amounts go unpaid.
A borrower should negotiate covenants that match its hedging policy, not the other way around: a covenant requiring 100% hedging for the full tenor may be impossible to meet onshore, and a covenant tested in dong terms may swing on revaluation, not performance.
Check also whether the loan’s security package secures hedge liabilities pari passu with the loan, whether hedge providers may vote on enforcement, and whether a hedge termination triggers a mandatory prepayment event.
Cross-border hedges are normally documented under an ISDA Master Agreement and Schedule, often with a Credit Support Annex. The issues for a Vietnamese borrower are the choice of governing law, the enforceability of close-out netting under Vietnamese insolvency law, the treatment of collateral, and the interaction between the Schedule’s events of default and the loan’s.
Detailed drafting of cross-currency swap terms is a separate subject; the hedging policy point is that no hedge should be executed until the board-approved templates, negotiation mandate and authorised signatories are in place. For loan terms alongside hedging, see our banking and finance practice. The SBV website publishes the foreign exchange circulars referenced above in their official texts, and the IFRS Foundation sets out IFRS 9 Financial Instruments.
Frequently Asked Questions
Is a hedging policy legally required for foreign borrowing?
No Vietnamese statute requires a stand-alone policy, but lenders, auditors and bond investors expect one. A board-approved hedging policy also supports the borrower’s evidence of real underlying exposure when dealing with banks.
Can a Vietnamese company use an offshore non-deliverable forward?
Only after legal clearance. Resident access to offshore dong-linked derivatives is restricted, so confirm the structure, counterparty and settlement route in writing, and watch basis risk against the onshore rate.
Which instrument suits a five-year USD loan?
Usually a cross-currency swap, because it hedges principal and interest together. Stacked forwards leave roll-over risk, and options add premium cost. Credit lines and netting enforceability must be checked first.
Does VAS recognise hedge accounting?
Not comprehensively. VAS lacks a full derivatives and hedge accounting standard, so P&L volatility can arise even when the hedge is effective. IFRS 9 applies only where an entity reports under IFRS.
Are FX losses on foreign loans tax-deductible?
Realised losses are generally deductible with proper documents. Unrealised revaluation differences follow special rules, and interest-cap provisions may interact. Verify current circulars and the new corporate income tax law before filing.
Next step: before your next drawdown or bond issue, ask your CFO to map every foreign currency flow for the next 36 months against a draft hedging policy, then bring that map to a legal and tax review.
Discuss your hedging policy with IVLF Advisors. Our banking, finance and tax team in Ho Chi Minh City and Hanoi can review your foreign borrowing structure, regulatory position and hedging documentation. Request a confidential preliminary consultation through the contact form on this website.
This article provides general information only and is not legal, tax or financial advice. Laws and regulations change, and several points above are flagged for verification. Please consult qualified advisers on your specific circumstances before acting.
This article is provided for general information only and does not constitute legal advice for any specific case. Regulations may change – please consult a qualified professional before acting. Should further analysis be required, please contact one of our lawyers below.
