Tiffany Report

Tiffany Case Report 1. In what way (s) is Tiffany exposed to exchange--‐rate risk subsequent to its new distribution arrangement with Mitsukoshi? How serious are these risks? In the past, Mitsukoshi bore all the foreign exchange risk. Under the new agreement, Tiffany should face the foreign exchange risk itself. In 1993, around 71 million dollar sales are earned by yen. So it should face the yen-dollar exchange rate risk. And at that time, yen was considered to be overvalued to dollar and expected to depreciate. So Tiffany faced the volatility of the yen-dollar rate changes. Because the yen-dollar rate changed very quickly, Tiffany’s foreign exchange risk is serious and it should take measures to hedge this risk. 2. Should Tiffany actively manage its yen--‐dollar exchange rate risk? Why or why not? Yes. Because the yen-dollar exchange rate changed quickly, yen was expected to depreciate and it might led great loss to Tiffany. 3. If Tiffany were to manage exchange crate 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? The objective should be hedge or control the foreign exchange risk. It means the management should control the amount of money exposed to yen-dollar risk. Yen-dollar exchange rate should be managed. 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? The chief difference is the holder of foreign exchange options has the option to decide whether or not they want the contract on expiry. Options give the buyers the right, while futures or forwards give buyers the obligation to purchase specific assets. For futures contract, investors can have it without paying any commissions but they should pay option premium. I suggest Tiffany use the futures contract to manage foreign exchange risk.