Tiffany & Co. Business Case
Table of Contents 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?
2. Should Tiffany actively manage its yen-dollar exchange rate risk? Why or why not?
3. If Tiffany were to manage exchange rate risk activity, what should be the objectives of such a program? Specifically, what exposures should be actively managed? How much of these exposures should be covered, and for how long?
4. As instruments for risk management, what are the chief differences of foreign exchange options and forwards or futures contracts? What are the advantages and disadvantages of each? Which, if either, of these types of instruments would be most appropriate for Tiffany to use if it chose to manage the exchange-rate risk?
Question 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?
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.
Question 2: Should Tiffany actively manage its yen-dollar exchange rate risk? Why or why not?
Yes, Tiffany should actively manage its yen-dollar exchange rate risk and hedge against this risk because if they did not they would be taking on too much risk. It is
2. Should Tiffany actively manage its yen-dollar exchange rate risk? Why or why not?
3. If Tiffany were to manage exchange rate risk activity, what should be the objectives of such a program? Specifically, what exposures should be actively managed? How much of these exposures should be covered, and for how long?
4. As instruments for risk management, what are the chief differences of foreign exchange options and forwards or futures contracts? What are the advantages and disadvantages of each? Which, if either, of these types of instruments would be most appropriate for Tiffany to use if it chose to manage the exchange-rate risk?
Question 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?
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.
Question 2: Should Tiffany actively manage its yen-dollar exchange rate risk? Why or why not?
Yes, Tiffany should actively manage its yen-dollar exchange rate risk and hedge against this risk because if they did not they would be taking on too much risk. It is