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Harvard Business School Case Study Tiffany Co 1993 World

Essay on Tiffany & Co. Case Analysis

1661 WordsJun 20th, 20097 Pages

Tiffany & Company

Tiffany has decided to sell direct in Japan as opposed to selling wholesale to Mitsukoshi and Mitsukoshi selling to the public. In this agreement Tiffany will give Mitsukoshi 27% of net retail sales in exchange for providing the boutique facilities, sales staff, collection of receivables, and security for store inventory. This new agreement exposes Tiffany to the fluctuation in the yen-dollar exchange rate. Therefore, they are considering two basic hedging alternatives to reduce exchange-rate risk on their yen cash flows. The first alternative was to sell yen for dollars at a predetermined price in the future using a forward contract. The second alternative was to purchase a yen put option allowing them to…show more content…

The downside is that options prices are more expensive when there is more volatility. Since the yen is thought to be overvalued there is speculation that it will depreciate in the future compared to the dollar. If the yen depreciates and Tiffany converts their yen at the prevailing spot rate then their dollars received will be decreased.

3.If Tiffany were to manage exchange rate risk activity, what should be the objectives of such a program? Specifically, what exposure should be actively managed? How much of these exposures should be covered, and for how long?

The objectives of managing exchange rate risk should not be to bet on currency fluctuations or to try to make a profit on exchange rates. Instead the objective should be to reduce risk associated with operating exposure. By hedging, Tiffany can reduce drastic fluctuates in net income due to currency exchange rate changes. Smoothing net income can help with taxes by keeping cash flows smooth instead of having huge profits followed by a loss. The main objective of managing exchange rate risk should be to decrease volatility and reduce risk. Tiffany should actively manage operational exposure and transaction exposure. The longer exposures are covered the more expensive the option is; therefore Tiffany should hedge short term and then roll their position forward. Since Tiffany has to repay for inventory

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Tiffany Case Hbs Essay

1529 WordsNov 5th, 20157 Pages

Key issue:
Tiffany and Co concluded an agreement with its Japanese Distributor, Mitsukoshi Limited. Tiffany & Co Japan assumed management responsibilities of the operation of 29 boutiques and was now responsible for millions of dollars of inventory that was previously sold wholesale to Mitsukoshi Limited. Tiffany & Co Japan now faces the risk of foreign currency fluctuations previously borne by Mitsukoshi Limited. Tiffany & Co Japan must now make the decision between basic hedging alternatives: Entering into forward agreements to sell yen for dollars or purchasing a yen put option.
Exposure
As Tiffany & Co’s receivable cash flows are now denominated in ¥ due at future date the firm now faces the foreign exchanges…show more content…

Analysis
External Size-up:
The slowing Japanese economy following a boom period of the 1980’s and early 1990’s has resulted in Japanese consumers becoming more cautious about spending, which has slowed demand for Tiffany & Co.‘s luxury items. Appreciation of the Yen/Dollar in the period from 1983-1993 shown in Appendix 1 has now lead to evidence of overvaluation from a purchasing power parity (PPP) perspective of the yen shown in Exhibit 7 of case. The Japanese Jewellery market has a value of $20 billion of which Tiffany & Co. currently has a 1% market share leaving potential growth in market share despite slowed demand.
Internal Size-up
As part of the arrangement Mitsukoshi would still receive 27% of net retail sales in compensation for providing boutique facilities, sales staff, collection of receivables, and security for store inventory. This will give Tiffany access to Mitsukoshi’s established sales networks although Tiffany & Co. would take over marketing responsibilities in Japan from Mitsukoshi. Mitsukoshi sold Tiffany & Co. merchandise at substantial premium that Tiffany management believe from which a retail price reduction of 20%-25% will likely result in a substantial increase in unit volume of jewellery sales. Due the significant number of Tiffany Boutiques operating in Japan, future openings there were expected to occur at a minimal rate

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