Finance: United States Dollar and Exchange Rate Risk

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INTERNATIONAL FINANCE
FIN 423, Spring 2013, UK
Case 2 questions: Tiffany & Co. --- 1993
Write-up Due: March 7, 2013 in class

Your write-up should be eight to ten pages (double-spaced). If you provide information outside the case or the textbook, use a footnote to indicate the source. You can use pictures, but no more than four, and each figure should be no more than half a page in size. 1. Executive Summary. Briefly describe the history and business of Tiffany’s Co. What type of decision did the company have to make in 1993? Why was the decision important? 2. History of Japanese Yen. Describe the historical exchange rates between Japanese Yen and U.S. dollar over time. Focus on the big changes and what was the exchange rate in (and years before) July 1993. 3. To Hedge or Not? Do you think Tiffany should actively manage its yen-dollar exchange rate risk? Why or why not? Explain the benefits and costs of hedging. 4. What to Hedge? If Tiffany were to manage its exchange rate risk, then identify what exposures should be managed via such a hedging program (e.g., hedge sales, hedge gross profit, or hedge cash flows, etc.). Explain why. 5. Forward or Options? If Tiffany were to hedge the yen-dollar exchange rate risk, it can choose either forward contracts or options. Explain how Tiffany can hedge using forward contracts? How to hedge using options? The available forward contracts and options are described in Exhibit 8, assuming Tiffany can only use those derivatives to hedge. Based on what you have learned in this course, what are the pros and cons of using options to hedge compared to using forward contracts to hedge? 6. Your Decision. If you were CFO of Tiffany, what would you have done in July 1993? No hedging at all? Or hedging? If you decided to hedge, quantify how much of these exposures should be covered and for how long. You have to justify your answers. Note that there is no “correct answer.” The reasoning is more important. You...
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