Finance

Tiffany Case

1. In what way(s) is Tiffany exposed to exchange-rate risk subsequent to its new distribution agreement with Mitsukoshi? How serious are these risks?

Exchange rate risk is associated with the effect of unexpected exchange rate changes on the value of the company. In 1993, Tiffany signed up the contracts with Mitsukoshi. Tiffany now obtained all the stores of Mitsukoshi. Tiffany & Company are exposed to exchange-rate risk subsequent to its new distribution arrangement with Mitsukoshi due to the fluctuating exchange rate. According to the historical data, Yen is usually more volatile and tends to fluctuate in the same way as the dollar did. Yen is also overvalued and could depreciate causing lost profits. These risks are apparently serious because they can harm both profit margin and the value of assets of the firms. No protecting themselves against this exchange rate risk will hurt the company’s sales, bottom line, and top line; therefore, it is extremely necessary that Tiffany realizes and analyzes these risks and overcome these problem.

2. Should Tiffany actively manage its yen-dollar exchange-rate risk? Why or why not?

Yes, I totally agree that Tiffany should actively administrate its exchange rate risks because it is now responsible for daily operations which were governed by Mitsukoshi in Japan in the past.

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

4. As instruments for risk management, what are the chief differences of foreign-exchange options and forward and futures contracts? What are the advantages and disadvantages of each? Which, if either, of these types of instruments would be most appropriate for Tiffany to use if it chose to manage exchange-rate risk?

5. How should Tiffany organize itself to manage its exchange-rate risk? Who...