2) Should Tiffany actively manage its yen-dollar exchange-rate risk? Why or why not?
3) If Tiffany were to manage its exchange-rate risk activity, what would 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 forward or future 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 ot manage its exchange-rate risk?
5) How should Tiffany organize itself to manage its exchange rate risk? Who should be responsible for its hedges? Who should have oversight responsibility for this activity? What controls should be put in place?
Case: Tiffany & Co- 1993 (HBS 298-014)
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?
Answer: About 15% of (1992) sales of $492mln or ~ $75mln will now be earned in Yen, but will have to be reported in $. At a Net Income (1992) of $25mln, the risks caused by this exposure are significant. Data from exhibit 6 shows that in a 6-month period (Apr-Sep) exchange rates fluctuated as much as 10%. (from 133.30 ¥/$ to 120.07 ¥/$). A 10% downward fluctuation like this would translate into a third of a drop in net results ($25mln -/- $75mln x 10%) to $16.67mln, assuming everything else stays the same (e.g. all costs incurred in $, prices to consumers remain unchanged).
2. Should Tiffany actively manage its yen-dollar exchange-rate risk?