Tiffany Case

Satisfactory Essays
Tiffany Case

Amy Simmons

Regis University

With the recent restructure of Tiffany Japan, the profits earned by our Japanese division are now exposed to foreign exchange risks that were previously not a concern. In light of this new exposure, it has become imperative that we needed to determine whether or not Tiffany should implement a risk management program using financial derivatives to hedge against this risk.

The first step in this evaluation was to determine the amount of profits that could be at risk. To do this, a pro forma income statement (see Table 2.1) was constructed for the remaining fiscal quarters of 1993. The income has been estimated by applying the previous years’ seasonality to Tiffany’s one percent market share of Japan’s $20 billion jewelry market. All expenses and other income with the exception of selling, general and administrative (SG&A) and provision for tax expenses were estimated using a trend analysis between fiscal years ended January 31, 1992 and 1993. SG&A expenses were calculated using the 27% agreed upon expense with Mitsukoshi for providing boutique facilities, sales staff, collection of receivable, and security for store inventory. Whereas, the taxes having seen a large drop between 1993 and 1993, were conservatively estimated using an average percentage between the two years. Using this method of profit estimation, it has been determined that the total Q3 profits that are subject to foreign currency risk are $568,831.

This expected positive income puts Tiffany is the long position, which indicates that to balance our risk we would need to consider a short position with respect to the Yen. Over the next three months, the market expects to see the yen appreciating again the dollar and is offering forward rates that are in line with this expectation. These forward rates would put Tiffany in another long position which would not hedge against our exchange risks. Our next option to hedge against any ForEx

You May Also Find These Documents Helpful

  • Good Essays

    Exchange rate risk relates to the effect of unexpected exchange rate changes on the value of the firm. Tiffany & Company are exposed to 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. Yen is also overvalued and could depreciate resulting in lost profits. These risks are fairly serious because they can decrease both profit margin and the value of assets of the company. Not protecting themselves against this exchange rate risk will hurt the company’s sales, bottom line, and top line; therefore it is extremely important that Tiffany realizes these risks.…

    • 594 Words
    • 2 Pages
    Good Essays
  • Good Essays

    To manage exchange rate risk activity, Tiffany’s objectives should be to minimize foreign exchange rate risk and lower counterparty risks. We want to minimize these risks because Tiffany & Co. is selling goods that are denominated in US dollars, but sold for yen in the Japanese market. The objective of this program is to prevent the depreciation of the yen against the US dollar by hedging the currency. The expected Japanese sales of Tiffany & Co. should be actively managed by purchasing hedging contracts continuously on expiration of previous contract.…

    • 262 Words
    • 2 Pages
    Good Essays
  • Good Essays

    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.…

    • 705 Words
    • 3 Pages
    Good Essays
  • Powerful Essays

    Williams Case

    • 1147 Words
    • 4 Pages

    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?…

    • 1147 Words
    • 4 Pages
    Powerful Essays
  • Powerful Essays

    Vera Bradley Case

    • 1327 Words
    • 6 Pages

    Vera Bradley is a start-up company which began from the basement of a home and grew to be a successful design-oriented bags & luggage company. As sales grew rapidly, Vera Bradley is currently facing some issues, one of among which will be addressed in this paper.…

    • 1327 Words
    • 6 Pages
    Powerful Essays
  • Good Essays

    Julia Steel Case

    • 727 Words
    • 3 Pages

    Mrs. Julia Steel is a patient I have had the pleasure of meeting with recently. As discussed during the appointment, Mrs. Steel is a 72 year old retired, married woman. Collectively, Mrs. Steel's family history includes the following information: one son at the age of 40 who is being treated for high blood pressure, father's record showed background of heart disease and deceased at the age of 90 due to a brain aneurysm, mother's record provided extensive history with heart disease and deceased due to congestive heart failure at the age of 92, brother who passed at the age of 81 due to heart disease, sister at the age of 76 who has suffered multiple minor heart attacks. According to the biographical data collected, her family history exhibits a…

    • 727 Words
    • 3 Pages
    Good Essays
  • Satisfactory Essays

    How did Caterpillar use strategy as a “real hedge” to reduce its exposure to foreign exchange risk? What is the downside of its approach?…

    • 467 Words
    • 2 Pages
    Satisfactory Essays
  • Good Essays

    JC Penny case

    • 461 Words
    • 2 Pages

    Founded in 1902, JC Penney is one of America’s leading retailers, operating more than 1,000 department stores throughout the United States and Puerto Rico, as well as offering products online and through catalogs. In January 2012, Johnson was recruited by J.C. Penney investors and left the United States’ second-most-valuable company, Apple, to join the J.C. Penney. He wanted a new challenge. CEO Ron Johnson introduced a plan to rebrand the department store J.C. Penney. The plan was involved and would completely restructure the department store as America knows it. Clear objectives were set. A plan was put into practice that would initiate a three-tiered pricing structure and remove all sales and promotions. A new logo was created. Stores were to be completely redesigned, and turned into 100 mini-stores within each J.C. Penney. Unfortunately, the plan was executed sloppily and J.C. Penney took a 25% loss in just one year. Ron Johnson was fired after only 17 months. J.C. Penney is now searching for a way to survive.…

    • 461 Words
    • 2 Pages
    Good Essays
  • Good Essays

    Lady Gaga Case

    • 2332 Words
    • 10 Pages

    Lady Gaga burst onto the music scene in 2008, after being signed on by superstar producer Vincent Herbert of Streamline Records. Young, talented, all out glam rock diva - within her first year she snagged 3 awards at the VMAs. Her spectacular performance heralded the launch of her upcoming collaboration with rap sensation Kanye West – together, they would co-lead a 3 month long, high profile arena tour called the ‘Fame Kills’ tour.…

    • 2332 Words
    • 10 Pages
    Good Essays
  • Good Essays

    Martha Stewart case

    • 1056 Words
    • 3 Pages

    Insider trading is an illegal activity that is believed to raise the cost of capital for securities issuers, therefore decreasing economic growth. It’s an illegal action that can be used by greedy individuals in order to avoid potential losses, or to make substantial gains without the information first being released to the public. Martha Stewart, who is a representative of successful woman, has a strong business in the United States. However, after her scandal blown out, her image was totally destroyed. Some people scold her to wear the mask, and some people scold her was a big swindler. Basically, the scandal of Martha Stewart was caused by a phone call from her old friend and also her stock account manager, Peter Bacanovic.…

    • 1056 Words
    • 3 Pages
    Good Essays
  • Good Essays

    Aifs Case Study

    • 1562 Words
    • 7 Pages

    The aim was now to have a spreadsheet that models the risks better. This more comprehensive spreadsheet covers different scenarios of demand and of the exchange rate, above all it accounts the price of hedging.…

    • 1562 Words
    • 7 Pages
    Good Essays
  • Good Essays

    Kate Spade Case

    • 636 Words
    • 3 Pages

    As the company has become bigger and its financial results were very strong, the team had begun to feel pressured to take the company next level. One of the team member felt that they were losing their control little by little since they had not ready for handling this issue yet. The team wanted to someone who was experienced and could manage developing team to next level. When Kate Spade was looking for some helps, Kate Spade was faced with offers from number of buyers, and what Kate Spade really needed was strategic help. In March 1998, the team had to think about four offers and decide which option the team should take for its company growth.…

    • 636 Words
    • 3 Pages
    Good Essays
  • Good Essays

    Dozier: Options

    • 1555 Words
    • 7 Pages

    Since the acceptance of Dozier Industries’ bid, the company CFO has been exploring the methods available to best manage the exchange risk associated with the award payment being dispersed in British Pounds (GBP). He originally considered a forward contract or a spot contract, but is now investigating how currency options could help hedge against uncertain foreign exchange exposure. The CFO needs to decide whether or not options contracts might provide some benefit to hedge the currency risk.…

    • 1555 Words
    • 7 Pages
    Good Essays
  • Good Essays

    4. Should Jaguar attempt to hedge its dollar exposure? Why or why not? What methods are available for hedging this exposure? What are the costs and benefits of each?…

    • 2456 Words
    • 8 Pages
    Good Essays
  • Powerful Essays

    In the early 1990’s the OTPP board realized that it was essential to begin investing abroad to diversify risk and to capitalize on international opportunities to achieve greater returns, given the size of the fund. However, it was not until 1996 that the Foreign Exchange Hedge Program (FX Hedge Program) was implemented in response to a significant rise in currency exposure. As the fund faced increased foreign currency risk, risk management became essential and thus, a hedging policy of 50% of its foreign currency exposure was introduced. Due to the fact that OTPP has a continual commitment in supporting its pensioners, it must expose itself to limited risk and effectively hedge against any unexpected changes in its investments. Hence, a conservative policy of hedging 50% of foreign exchange exposure was enforced.…

    • 1378 Words
    • 6 Pages
    Powerful Essays