South Pacific Development Foundation: Finance Portfolio Management

This case study assesses the financial performance of the South Pacific Development Foundation (SPDF) and identifies the necessity for effective hedging strategies. It includes a regression analysis to ascertain Samoa's required level of exposure for maintaining its currency peg. SPDF requires hedging to mitigate adverse effects on its financial performance. The analysis explores various hedging instruments, such as future, option, and forward contracts, while acknowledging Samoa's limited access to sophisticated hedging tools. The study also evaluates the movement of the Tala against other currencies and suggests that SPDF should hedge its bond investments while allowing its equities to adjust to market values, thereby maintaining a stable income stream from fixed interest investments. The report concludes with specific currency weights derived from regression analysis to guide SPDF's borrowing strategies in different currencies.

Running head: FINANCE PORTFOLIO MANAGEMENT
Finance Portfolio Management
Name of the Student:
Name of the University:
Authors Note:

FINANCE PORTFOLIO MANAGEMENT
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Executive Summary:
The assessment has evaluated the current performance of South Pacific Development
Foundation, while detecting the overall needs of adequate hedging measure by the
organisation. In addition, relevant regression analysis has been conducted to determine the
level of exposure that is needed by Samoa for continuing the pegging function. Furthermore,
hedge is mainly needed by SPDF for reducing the negative impact on their performance.

FINANCE PORTFOLIO MANAGEMENT
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Table of Contents
Question 1:.................................................................................................................................3
Question 2:.................................................................................................................................3
Question 3:.................................................................................................................................4
Question 4:.................................................................................................................................4
Question 5:.................................................................................................................................5
Question 6:.................................................................................................................................5
References and Bibliography:....................................................................................................6
Appendices:................................................................................................................................7

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Question 1:
South Pacific Development Foundation is not a profit-making organisation, as it
provides financial services to women. However, the organisation aims in providing assistance
to women without increasing their profitability, which needs adequate funding. Therefore, the
company will require adequate loan from USA at low interest rates for supporting the capital
requirements. In accordance with appendix 1, the increment in currency value by 5% will
raise profits, while the decline of 5% will results in loss. Therefore, adequate hedging needs
to be conducted by the company for reducing the occurrence of loss (Statman 2018).
Question 2:
There are adequate hedging instruments that can be used by the organisation for
curbing the risk involved in foreign currency exposure. The different types of hedging
instruments are future contract, option contracts, and forward contracts. However, Samoa
does not have the facilities of high-end hedging instruments, which can be used by
originations for hedging their foreign currency hedge. The current organisational size of
South Pacific Development Foundation is relevantly huge, where without the occurrence of
adequate hedge the company will still able to operate without any problems.

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Question 3:
Feb-98
Jul-98
Dec-98
May-99
Oct-99
Mar-00
Aug-00
Jan-01
Jun-01
Nov-01
Apr-02
Sep-02
Feb-03
Jul-03
Dec-03
May-04
Oct-04
Mar-05
Aug-05
Jan-06
Jun-06
Nov-06
Apr-07
Sep-07
-
0.50
1.00
1.50
2.00
2.50
3.00
3.50
4.00
Price Movement of Tala
Tala/USD Tala/NZD Tala/Euro
The pegged method has been used for the currency of Samoa, as it helps in basking
the currency of key trading partners. In addition, the country follows a fixed currency
composition scheme where adequate weights are assigned to the currency, which helps in
determining the value of local currency. The above figure has directly portrayed the change
in values of Tala against other currencies, which help in detecting the changes in value of
Tala with other countries currency. The value of Tala against USD has mainly appreciated,
while its value has declined with NZD and EURO.
Question 4:
The knowledge regarding the exchange rate regime of Samoa can allow the
organisation to make adequate decisions regarding the hedging process that is required for
reducing the risk from foreign currency. Tala is pegged with the basket of foreign currency,
where hedging needs to be conducted against the movement of the currencies.

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Question 5:
Particulars Currency Weights
USD/Tala 30.56%
USD/NZD 39.93%
USD/Euro 15.09%
Th above table provides the weight, which has been arrived by conducting relevant
regression analysis that helps in detecting the minimum weight the currency basket needs to
have in the portfolio. Therefore, the current basket pool comprises of the above weights in the
currency, where the interest rates are constant than the organisation has the option to borrow
from anywhere. Hence, SPDB can use the above weight for detecting the percentage of
borrowings that is needed in each currency (Statman 2018).
Question 6:
SPDB needs to conduct relevant hedge in their bond investment, while leaving the
equities. This would allow the organisation to maintain adequate level of income from fixed
interest, while allowing its equities to discount, as per the market values. Moreover, the
organisation has conducted exposure in currencies, who has sound economy, which in turn
will reduce the change of currency depreciation. Therefore, SPDB needs to conduct adequate
hedging of their bonds for reducing the negative impact on their income.

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References and Bibliography:
Härdle, W.K., Chen, C.Y.H. and Overbeck, L. eds., 2017. Applied quantitative finance (Vol.
2). Springer.
Rebentrost, P. and Lloyd, S., 2018. Quantum computational finance: quantum algorithm for
portfolio optimization. arXiv preprint arXiv:1811.03975.
Statman, M., 2018. Rebalancing According to Behavioral Portfolio Theory. Statman, Meir,"
Rebalancing According to Behavioral Portfolio Theory," Journal of Financial Planning,
pp.29-31.
Uzuegbunam, I., Ofem, B. and Nambisan, S., 2017. Do Corporate Investors Affect
Entrepreneurs’ IP Portfolio? Entrepreneurial Finance and Intellectual Property in New
Firms. Entrepreneurship Theory and Practice, p.1042258717738247.

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Appendices:
Appendix 1:
Particulars Value
Spot Rate USD/Tala 0.39
Loan value in USD 100,000.00
Loan value in Tala 256,000.00
Increment by 5% 0.41
Value in Tala 243,809.52
Profit from loan 12,190.48
Particulars Value
Spot Rate USD/Tala 0.39
Loan value in USD 100,000.00
Loan value in Tala 256,000.00
Decline by 5% 0.37
Value in Tala 269,473.68
Loss from loan (13,473.68)
Appendix 2:
SUMMARY
OUTPUT
Regression Statistics
Multiple R
0.82709
2733
R Square
0.68408
2389
Adjusted R
Square
0.67863
5534

FINANCE PORTFOLIO MANAGEMENT
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Standard
Error
0.00953
251
Observations 119
ANOVA
df SS MS F
Signific
ance F
Regression 2
0.022824
804
0.01141
2402
125.59
2171
9.44675
E-30
Residual 116
0.010540
774
9.08687
E-05
Total 118
0.033365
578
Coeffici
ents
Standard
Error t Stat P-value
Lower
95%
Upper
95%
Lower
95.0%
Upper
95.0%
Intercept
-
0.00094
4752
0.000880
665
-
1.07277
1858
0.2856
00172
-
0.00268
902
0.0007
99515
-
0.00268
902
0.00079
9515
X Variable 1
0.39931
2092
0.036129
897
11.0521
2386
7.7913
7E-20
0.32775
228
0.4708
71905
0.32775
228
0.47087
1905
X Variable 2
0.15093
3976
0.044766
828
3.37155
8445
0.0010
16064
0.06226
7633
0.2396
00319
0.06226
7633
0.23960
0319