Tiffany & Co. Case Analysis Essay

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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…
Since the repayment is done on a quarterly basis Tiffany should buy a synthetic forward for three months to match their yen liability. This way, as the economy and outlook for sales changes, Tiffany can adjust their hedging strategy on a quarterly basis and hedge that amount minus their inventory repayment to Mitsukoshi.

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? What, if either, of these instruments would be most appropriate for Tiffany to use if it chose to manage exchange rate risk?

With foreign exchange options you pay the price up front and at expiration you have the option to exercise. If you buy a call option and at expiration it is in the money you will exercise your option and buy at the strike price. On the other hand, if the call is out of the money you will buy in the market place. This means you are not locked in to buying at a set price, but if favorable you have the option to do so. This is beneficial if you are uncertain you will need to hedge (uncertain cash flow or bid on a contract that you might not get) or if you want to keep the upside potential and do not want to lock into a specific rate. A forward contract is usually cheaper and it locks in the exchange rate to be made at a future date. The downside to a forward contract is that once you enter into it you have to
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