Tifanny & Co. Harvard Case Study 9 296 047

799 words - 4 pages

Case BackgroundIn July 1993, Tiffany & Company reorganized its Japanese distribution channel by repurchasing its inventory from its Japanese distributor Mitsukoshi Limited. As a result of this action, Tiffany would assume the responsibility of establishing yen retail prices, holding inventory in Japan for sale, and controlling local Japanese management. Tiffany would be able to have control over retail price in Japan where historically had higher price. Under the previous arrangement, Tiffany contracted Mitsukoshi as the principal retailer in Japan and the transaction of wholesaling to Mitsukoshi was settled in U.S. dollar, under the new agreement, Tiffany now faced the risk of foreign ...view middle of the document...

For the inventory they have to repurchase their concern would be that they have enough cash coming in, in yen, from sales. Thus the main objective of Tiffany's risk management policy is to minimize the future cash flow fluctuations with respect to its investment needs. In addition to the mentioned exchange rate exposure, Tiffany could face additional economic exposure such as a depreciation of the currency of its competitors; these competing goods would then be cheaper in Japan. However, economic exposure risk is less easy to measure and hedge.Alternative Ways to Manage Exchange Rate RiskFor Tiffany to hedge its ¥/$ exchange rate exposure, it can choose either foreign currency options or future/forward contracts. A company due to receive foreign currency at a known time in the future can hedge its risk by buying put options, which matures at that time, on that foreign currency. This guarantees that the value of the foreign currency will not be less than the exercise price, while allowing the company to benefit from any favorable exchange rate movements. A forward contract, however, locks in the exchange rate for a future transaction,...

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