Hedge Tiffany and Co.'s Foreign Currency Exposure in Japan

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Hedging Tiffany and Co.’s Foreign Currency Exposure in Japan

Prepared for the Board of Directors of Tiffany & Company D.A.M.M. Business Consultants June 15, 1993

Table of Contents
Executive summary ………………………………… Risk of foreign exchange exposure in Japan ……… Overview of the Japanese Economy ………………. Industry analysis ……………………………………. Internal & external environmental analysis………. Financial analysis …………………………………... Hedging foreign exchange exposure ………………. Recommendation …………………………………… Appendices …………………………………………. Bibliography ……………………………………….. page 3 Page 4 Page 4 Page 7 Page 9 Page 12 Page 14 Page 16 Page 18 Page 25

Executive summary
The new era for Tiffany & Company, one with a world without borders, is ready to be conquered. The market is opening up into one global realm and the future for Tiffany‟s retail jewelry base in Japan could be lucrative.

It is no secret that Japanese consumers are the biggest spenders on luxury items in the world. Japanese consume 41% of the luxury good market world wide giving Tiffany‟s a market well suited for their products. (Kogler, 2006) The prestige associated with Tiffany‟s brand name gives the company a good position in this influential Asian market.

In the last few years the Japanese economy has seen some hard times. Forecasts are showing that we are at the end of this downward economic trend within Japan and that an upward trend could follow. The ability for Tiffany & Company to control the retail sales and grow its market share within the Japanese market could parallel a growth in the Japanese economy that is forecasted to come. If the forecasts are on, the future for Tiffany‟s could be one of substantial growth within the Japanese market.

D.A.M.M. Business Consultants would like to thank Tiffany & Company for acquiring our expertise in the area of Asian markets.

Primary Issue: risk of foreign exchange exposure in Japan
Controlling the retail sales within Japan could potentially translate into wider margins for Tiffany & Company, but the future is not without risk. Tiffany and Company will now assume all the foreign exchange risk previously held by Mitsukoshi, a major shareholder of the company. No longer will Tiffany be paid in American dollars like in the past. All sales will be made in Yen and be paid to Tiffany‟s in Yen. It is crucial that the board of directors for Tiffany & Company review the recommendations we will be offering in this report in order to access the best choice of all available alternatives that minimizes the foreign exchange risk.

Overview of the Japanese Economy – June 1993
Tiffany and Company is looking to conclude an agreement with its Japanese distributors Mitsukoshi which would see the American company assume management responsibilities in the operation of 29 retail stores in Japan. Previously operated by Mitsukoshi, it is the goal of Tiffany and Company to have this agreement in writing by July 1993. D.A.M.M. Business Consultants have researched the Japanese economy as a whole and the results are as follows:

As a starting point in the analysis of the Japanese economy, D.A.M.M. Business Consultants believe it is necessary to use the last time the Japanese economy was at a peak of employment. This give us a better understanding at what point we are at today in the economy whether it be high (using measure like employment and GDP statistics) or low.

The Japanese economy was at its peak of employment in 1991. (See appendices 1.1) By August of 1992 a reduction of interest rates was implemented in the hopes to stimulate the economy. (See appendices 1.2) This did not halt the rise in the unemployment rate seen at the end of 1992. (See appendices 1.1)

The current year, although we are only half way through it, has offered us some insight as to where the Japanese economy could be going. What we do know is that growth in GDP has been on a downward trend since the high employment rates seen in 1991. (See appendices 1.3) How...
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