Essay on Tiffany & Co. Case Analysis

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Tiffany & Company

Tiffany has decided to sell direct in Japan as opposed to selling wholesale to Mitsukoshi and Mitsukoshi selling to the public. In this agreement Tiffany will give Mitsukoshi 27% of net retail sales in exchange for providing the boutique facilities, sales staff, collection of receivables, and security for store inventory. This new agreement exposes Tiffany to the fluctuation in the yen-dollar exchange rate. Therefore, they are considering two basic hedging alternatives to reduce exchange-rate risk on their yen cash flows. The first alternative was to sell yen for dollars at a predetermined price in the future using a forward contract. The second alternative was to purchase a yen put option allowing them to
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The downside is that options prices are more expensive when there is more volatility. Since the yen is thought to be overvalued there is speculation that it will depreciate in the future compared to the dollar. If the yen depreciates and Tiffany converts their yen at the prevailing spot rate then their dollars received will be decreased.

3.If Tiffany were to manage exchange rate risk activity, what should be the objectives of such a program? Specifically, what exposure should be actively managed? How much of these exposures should be covered, and for how long?

The objectives of managing exchange rate risk should not be to bet on currency fluctuations or to try to make a profit on exchange rates. Instead the objective should be to reduce risk associated with operating exposure. By hedging, Tiffany can reduce drastic fluctuates in net income due to currency exchange rate changes. Smoothing net income can help with taxes by keeping cash flows smooth instead of having huge profits followed by a loss. The main objective of managing exchange rate risk should be to decrease volatility and reduce risk. Tiffany should actively manage operational exposure and transaction exposure. The longer exposures are covered the more expensive the option is; therefore Tiffany should hedge short term and then roll their position forward. Since Tiffany has to repay for inventory

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