Tiffany & Co Case Study Essay

BackgroundTiffany & Co. was founded in 1837 in New York City by Charles Lewis Tiffany and John B. Young. After decades of development, the ac confederacy has grown to an internationally famous designer and retailer of fine jewelry, diamonds, timepieces and otherwise luxury accessories. In July 1993, Tiffany made a decision to directly become sales in Japan, rather than profiting from medium corporation Mitsukoshi. According to this decision, Tiffany exit pay Mitsukoshi 27% of net retail sales for providing the local run and bearing the run a risk of holding inventories. Below is a snap snatch of the financial summary of Tiffany & Co from 1988 to 1993. The enume consecrate revenues grew sustainably over the past times years before the decision. However, for the cash flow statements, the company had been losing profits in terms of investments.Two-Pillar StrategyThe new decision put Tiffany to a really difficult situation where the firm will face the magnetic variation o f the long-dollar switch over range. Due to the fact that the yen is admited to be overvalued with regards to the dollar, the un trustworthyty of future rates will diminish the companys profits. In addition, Tiffany also keeps the company receptive to the volatility of the future exchange rate and related risks detain unhedged.As a result, the worry came up with two-pillar strategy to dish out yen for dollars at a preset price in the future with a forward contract and to buy a yen put preference with the flexibility to excise in the future with a more well-disposed 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 flash strategy will allow Tiffany the right, but not the obligation to sell yen at a pre-decided price in the future.Strategy analysisA fter this new agreement with Mitsukoshi, Tiffany & Co are exposed to significant exchange risk. 75 of 492 million US dollar total revenue will be settled in terms of Nipponese yen. This counted for approximately 15% of the revenue of 1992. The net income would also suffer from the depiction of foreign currency exchange rate. The number of 1992 is 25 million US dollar. According to the case, there is high possibility that 10% of fluctuation would be reasonable, which whitethorn potentially cause a down fall of about 20 million US dollars loss. There will be no doubt that Tiffany should proactively manage its yen-dollar exchange risk. Investors value companies which will provide a solid solution for offshore business risk management.The company may just lose portion of revenues in the beginning. However, if the issue remains scatty sufficient attention, it will eventually have negative influence on the core business revenues. Customers will start to question the companys br and equity. Investors would doubt the continuing profit-generating capacities of the equity. These facts will cause much stronger fluctuation and more severe fundamental problems. In terms of the risk management objectives, each firm will vary because of different risk appetite. In the industry, analysts will run VaR test based on certain scenario and yield various possible results. The management should analyze on the risk within a scale which tailors to the companys specific needs. In my own opinion, company should aim at hedging the exchange rate risk instead of gaining extra profits from the derivatives market place.ConclusionFrom the below separate shot of yen/dollar exchange rate from 1989 to 1993, we can refrain the rate will be rather volatile and unpredictable. Additionally, there was market assumption that the yen was overvalued in terms of dollar. Therefore, it would be natural to consider the possibility of the yen crashing. Thus, a yen put option seems to be a more f avorable strategy for Tiffany.