Wednesday, March 13, 2019

Tiffany & Co Case Study Essay

BackgroundTiffany & Co. was founded in 1837 in New York City by Charles Lewis Tiffany and seat 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 finding to directly ope lay out gross sales in Japan, rather than profiting from medium potentiometer Mitsukoshi. According to this decision, Tiffany will pay Mitsukoshi 27% of net retail sales for providing the local services and bearing the endangerment of holding inventories. Below is a snap shot of the financial summary of Tiffany & Co from 1988 to 1993. The make out revenues grew sustainably all over the past years before the decision. However, for the cash flow statements, the company had been losing cyberspace in terms of investments.Two-Pillar outlineThe new decision mystify Tiffany to a very difficult situation where the firm will face the mutant of the yen-dollar exchange rates. Due to the fact that the yen is carryed to be overvalued with regards to the dollar, the un legitimatety of proximo tense rates will diminish the companys profits. In addition, Tiffany also keeps the company open to the volatility of the future exchange rate and connect risks remain unhedged.As a result, the management came up with two-pillar strategy to plow yen for dollars at a preset scathe in the future with a forward repress 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 localisation 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 arrangements 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 AnalysisAfter this new agreem ent with Mitsukoshi, Tiffany & Co are exposed to significant exchange risk. 75 of 492 million US dollar total revenue will be settled in terms of Japanese yen. This counted for approximately 15% of therevenue of 1992. The net income would also suffer from the movie 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 hesitation 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 missing sufficient attention, it will eventually have negative influence on the core business revenues. Customers will start to question the companys brand 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 marketplace.ConclusionFrom the below separate shot of yen/dollar exchange rate from 1989 to 1993, we can intermit 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 favorable strategy for Tiffany.

No comments:

Post a Comment