Tiffany Case

Tiffany Case Study

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?

In July 1993 Tiffany & company had an agreement with Mitsukoshi Limited that changed the business plan in Japan. Tiffany now owns all previously owned stores by Mitsukoshi. Previously, Mitsukoshi ensured that Tiffany never had to worry about exchange-rate fluctuations and guaranteed a certain amount of cash flows to Tiffany in their wholesale transactions. Mitsukoshi bore the risk of any exchange-rate fluctuations that took place between the time it purchased the inventory from Tiffany and when it finally made the cash settlement Exchange rate risk relates to the effect of unexpected exchange rate changes on the value of the firm. Tiffany is exposed to the exchange-rate risk subsequent to its new distribution arrangement with Mitsukoshi due to the fluctuating exchange rate. Yen is usually more volatile and tends to fluctuate in the same direction as the dollar. Since yen is also overvalued (exhibit 7) and could depreciate resulting in lost profits. These risks are fairly very serious because they can decrease both profit margin and also the value of the assets of the company. Not protecting themselves against these exchange rate risks will hurt the company's profits and is therefore extremely important that Tiffany realizes these risks.

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

Yes, Tiffany should actively manage its exchange rate risks as it is now responsible for daily operations which were previously managed by Mitsukoshi in Japan. Since Tiffany is now responsible holding inventory in Japan for sale , managing and funding local advertising and promotion programs, and controlling local Japanese management. Since all above operations results in operating expenses in local currency Yen, and resulting profits had to be...