Tiffany Case
Tiffany & Co Case Study
Background
Tiffany & Co. was founded in 1837 in New York City by Charles Lewis Tiffany and John B. Young. After decades of development, the company has grown to an internationally famous designer and retailer of fine jewelry, diamonds, timepieces and other luxury accessories.
In July 1993, Tiffany made a decision to directly operate sales in Japan, rather than profiting from medium corporation Mitsukoshi. According to this decision, Tiffany will pay Mitsukoshi 27% of net retail sales for providing the local services and bearing the risk of holding inventories. Below is a snap shot of the financial summary of Tiffany & Co from 1988 to 1993. The total revenues grew sustainably over the past years before the decision. However, for the cash flow statements, the company had been losing profits in terms of investments.
Two-Pillar Strategy
The new decision put Tiffany to a very difficult situation where the firm will face the fluctuation of the yen-dollar exchange rates. Due to the fact that the yen is considered to be overvalued with regards to the dollar, the uncertainty of future rates will diminish the company’s profits. In addition, Tiffany also keeps the company exposed to the volatility of the future exchange rate and related risks remain unhedged. As a result, the management came up with two-pillar strategy – to sell yen for dollars at a preset price in the future with a forward contract and to buy a yen put option with the flexibility to excise in the future with a more favorable price.
The first strategy is to get a short position in a forward contact, which sells yen to the counterparty at a pre-decided price in the future. Tiffany and the counterparty of the contact both have the obligations to honor the agreement until the contract is expired. The second strategy will allow Tiffany the right, but not the obligation to sell yen at a pre-decided price in the future.
Strategy Analysis
After this new agreement with
Background
Tiffany & Co. was founded in 1837 in New York City by Charles Lewis Tiffany and John B. Young. After decades of development, the company has grown to an internationally famous designer and retailer of fine jewelry, diamonds, timepieces and other luxury accessories.
In July 1993, Tiffany made a decision to directly operate sales in Japan, rather than profiting from medium corporation Mitsukoshi. According to this decision, Tiffany will pay Mitsukoshi 27% of net retail sales for providing the local services and bearing the risk of holding inventories. Below is a snap shot of the financial summary of Tiffany & Co from 1988 to 1993. The total revenues grew sustainably over the past years before the decision. However, for the cash flow statements, the company had been losing profits in terms of investments.
Two-Pillar Strategy
The new decision put Tiffany to a very difficult situation where the firm will face the fluctuation of the yen-dollar exchange rates. Due to the fact that the yen is considered to be overvalued with regards to the dollar, the uncertainty of future rates will diminish the company’s profits. In addition, Tiffany also keeps the company exposed to the volatility of the future exchange rate and related risks remain unhedged. As a result, the management came up with two-pillar strategy – to sell yen for dollars at a preset price in the future with a forward contract and to buy a yen put option with the flexibility to excise in the future with a more favorable price.
The first strategy is to get a short position in a forward contact, which sells yen to the counterparty at a pre-decided price in the future. Tiffany and the counterparty of the contact both have the obligations to honor the agreement until the contract is expired. The second strategy will allow Tiffany the right, but not the obligation to sell yen at a pre-decided price in the future.
Strategy Analysis
After this new agreement with