Tifanny & Co. Harvard Case Study 9-296-047

Case Background

In July 1993, Tiffany & Company reorganized its Nipponese distribution direct by repurchasing its inventory from its lacquerese distributor Mitsukoshi Limited. As a result of this action, Tiffany would assume the responsibility of establishing yen retail prices, prop inventory in japan for sale, and controlling local Japanese management. Tiffany would be able to have control everywhere retail price in Japan where historically had higher price. down the stairs the previous arrangement, Tiffany contracted Mitsukoshi as the principal retailer in Japan and the transaction of wholesaling to Mitsukoshi was settled in U.S. dollar, under the unexampled agreement, Tiffany now faced the risk of exposure of foreign currency fluctuations.

Reasons for Managing deputise Rate Risk

Tiffany should actively manage its yen-dollar exchange rate risk for several reasons:

*         Exchange rate fluctuation increases the cash influx volatility, which could in turn affect Tiffanys cash position and measure implication,

*         Historically yen/dollar exchange rate has been volatile,

*          attention drop concentrate on its main business,

*         The cost of hedging or insurance was not substantial, cost is zero on average if the forward rate equals the expected spot rate,

*          there exists efficient foreign currency markets that Tiffany can rely on

Tiffanys gross revenue in Japan was about $200 million (1% of the $20b Japan market), which is sufficiently medium-large compared with the $18.0 million anticipated capital expenditures in FY 1993. Moreover, the $115 million reversal of inventory from Mitsukoshi which would be repurchased over the next 4 ½ year also presented a large amount of cash flow that could have large fluctuations if left hand unprotected. [this amount will be paid out in yen , so it wont really be affected by the Yen/S exchange rate as Tiffanys can just use cash flows from its sales in Japan to pay. Therefore their main concern as far as...

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