Tiffany com Essay Example for Free

Tiffany com EssayIn what way(s) is Tiffany exposed to exchange-rate risk subsequent to itsnew dispersal agreement with Mitsukoshi? How serious are these risks?Answer About 15% of (1992) sales of $492mln or $75mln will forthwith be earned inYen, but will have to be reported in $. At a Net Income (1992) of $25mln, the risks caused by this exposure are profound. Data from exhibit 6 shows that ina 6-month period (Apr-Sep) exchange range fluctuated as much as 10%. (from 133.30 /$ to 120.07 /$).A 10% downward fluctuation like this would supply into a third of a drop in net results ($25mln -/- $75mln x 10%) to . 67mln, assuming everything else stays the same (e.g. all costs incurred in $, prices to consumersremain unchanged).1.In what ways is Tiffany exposed to exchange-rate risk subsequent to its new dispersal agreement with Mitsikoshi? How serious are these risks?Tiffany is exposed to foreign exchange risk by selling in a flash to the Japanesemarket. When they sold wholesale to Mitsukoshi, Mitsukoshi bore all the foreign exchange risk. Under this new agreement Tiffany is like a shot exposed to the volatile fluctuations in the yen-dollar exchange rate. Since Tiffany is making profits in yen they have to transmute the yen to dollars to take back to their home country. Since the yen is thought to be overvalued in comparison to the dollar, the upcoming exchange rate can decrease Tiffanys profits.Also, the extreme volatility in the exchange rate creates significant uncertainty in what the future exchange rate and profits will be if left unhedged. The roughly important foreignexchange risk facing Tiffany is2. Should Tiffany actively manage its yen-dollar exchange-rate risk? Why or why non?Answer Tiffany should actively manage its /$ exchange rate risk for the following reasons1. The possible impact on its result as described in the answer to question 1is significant2. There are potent indicators (on a PPP-basis the Yen is highly overvalued) that a corre ction will occur, which might mean even bigger exchange-rate fluctuations than have occurred in the past.The way Tiffany manages its /$ exchange-rate risk is of course a function of how exchange-rate development scenario s occupy to the cost involved in the instruments used in managing this