Case | HBS Case Collection | September 2008

Samoa Tala

by Joshua D. Coval, Bhagwan Chowdhry and Konark Saxena

Abstract

This case examines currency risks faced by Microfinance Institutions, and evaluates strategies to hedge them in countries with pegged currency regimes and no derivatives markets. An MFI based in Western Samoa borrows in different currencies like the US dollar and the New Zealand dollar is worried about the additional variability in its cash flows due to unexpected currency fluctuations, and wants to explore strategies to hedge this risk in the absence of a derivatives market for the Samoan Tala. It seems to the president of the company that borrowing in different currencies, in proportions equal to the weights of the currencies in the basket peg, would reduce the currency risk. He wants to estimate the exact weights of the currencies in the basket peg and measure the reduction of currency risk using this strategy.

Keywords: Cash Flow; Currency Exchange Rate; Microfinance; Risk and Uncertainty; Financial Services Industry; Samoa;

Citation:

Coval, Joshua D., Bhagwan Chowdhry, and Konark Saxena. "Samoa Tala." Harvard Business School Case 209-053, September 2008.