Tiffany & Company (1993)

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Tiffany & Company Case Analysis
I.Statement of Issue
Should Tiffany hedge against translation risk from their Japanese subsidiary?

II.Relevant Facts
Establishment of Tiffany-Japan with new responsibility of setting yen prices and managing currency risk. •Eurodollar 3-month forward rate3.25%
Euroyen 3-month forward rate3.1875
Yen/Dollar spot rate¥106.3500
3-months forward¥106.3300
94 SEP call price1.99 (100ths of a cent per yen, ¥6,250,000/contract) •93.5 SEP put price2.03 (100ths of a cent per yen, ¥6,250,000/contract) •First six months of fiscal year, dollar depreciated from 124.80 to 106.35 or 3.15% per month. Three-month forward quotes also reflect dollar depreciation from 124.865 to106.33 or 3.16% per month. •Technical chart indicates dollar depreciation.

III.Relevant Assumptions
Management policy to grow aggressively using retained earnings. •Tiffany sales: one percent of $20 billion Japanese jewelry market or approximately $200 million •Zero growth assumption due to restructuring and Japanese perception of management. •Purchase of inventory from Mitsukoshi through Tiffany-Japan, therefore, in yen and no currency risk. •Net profit margin of six percent. This is arrived from reviewing the past trend of selected ratios in Exhibit 3. The current 3.2% reflects the buyout, etc. and is probably low. However, the trend has been downward and six percent reflects continuance of the trend as management responds to the buyout.

IV.Conclusion/Recommendation
No hedge since dollar is expected to depreciate against the yen. No translation risk since appreciating yen will convert to more dollars in the translation to the home currency. •If hedging was desired for forward rate analysis of a depreciating dollar, hedge by buying 26 SEP 94 calls. This isn’t relevant for Tiffany’s risk exposure, however. •For Tiffany’s translation risk (depreciating yen), the best hedge would be to buy 93.5 SEP puts for 2.06 or $0.000206/yen x...
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