Tiffany Case
1) In what way(s) is Tiffany exposed to exchange-rate risk subsequent to its new distribution agreement with Mitsukoshi? How serious are these risks?
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1) Transaction Exposure, the probability of loss associated with a business transaction denominated in a foreign currency, due to changes in the exchange rate .
2) Operating exposure is the degree of risk that a company is exposed to when there is some type of change in varying currency values that are relevant to the operation of the company. Tiffany is exposed to foreign exchange risk by selling directly to the Japanese market. The extreme volatility in the exchange rate creates significant uncertainty in what the future exchange rate and profits will be if left unprotected. It is the unpredictable foreign exchange rate fluctuations that pose a serious risk in the Tiffany case. Classic behavior of the Yen/Dollar exchange rate over the years has proven to be volatile. Even when we look at the data for a six month period, April through September, the exchange rates fluctuated as much as 10%, (from 133.30 Yen/$ to 120.07 Yen/$). {Exhibit 6}
Assuming that all costs incurred in $ dollars and prices for consumers remains the same, the 10% fluctuation as we see during this 6 month period, translated into dollars, represents a third of a reduction in the net results. ($25 mln -/- $75 mln x 10%) to $16.67mln. Tiffany is making profits in Yen they have to convert the Yen to $ dollars to take bring back to the United States.
2) Should Tiffany actively manage its yen-dollar exchange-rate risk? Why or why not?
Tiffany should actively manage its yen-dollar exchange risk. With Tiffany now doing business in Japan, they have the potential to have a large amount of Yen cash flow. If Tiffany doesn’t mange the currency exchange risk then their profits will fluctuate. As we see over the 6 month period outlined above, the exchange rate fluctuated by 10%. By implementing a hedging strategy they can secure their earnings and
.
1) Transaction Exposure, the probability of loss associated with a business transaction denominated in a foreign currency, due to changes in the exchange rate .
2) Operating exposure is the degree of risk that a company is exposed to when there is some type of change in varying currency values that are relevant to the operation of the company. Tiffany is exposed to foreign exchange risk by selling directly to the Japanese market. The extreme volatility in the exchange rate creates significant uncertainty in what the future exchange rate and profits will be if left unprotected. It is the unpredictable foreign exchange rate fluctuations that pose a serious risk in the Tiffany case. Classic behavior of the Yen/Dollar exchange rate over the years has proven to be volatile. Even when we look at the data for a six month period, April through September, the exchange rates fluctuated as much as 10%, (from 133.30 Yen/$ to 120.07 Yen/$). {Exhibit 6}
Assuming that all costs incurred in $ dollars and prices for consumers remains the same, the 10% fluctuation as we see during this 6 month period, translated into dollars, represents a third of a reduction in the net results. ($25 mln -/- $75 mln x 10%) to $16.67mln. Tiffany is making profits in Yen they have to convert the Yen to $ dollars to take bring back to the United States.
2) Should Tiffany actively manage its yen-dollar exchange-rate risk? Why or why not?
Tiffany should actively manage its yen-dollar exchange risk. With Tiffany now doing business in Japan, they have the potential to have a large amount of Yen cash flow. If Tiffany doesn’t mange the currency exchange risk then their profits will fluctuate. As we see over the 6 month period outlined above, the exchange rate fluctuated by 10%. By implementing a hedging strategy they can secure their earnings and