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Tiffany Case Hbs

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Tiffany and Co concluded an agreement with its Japanese Distributor, Mitsukoshi Limited. Tiffany & Co Japan assumed management responsibilities of the operation of 29 boutiques and was now responsible for millions of dollars of inventory that was previously sold wholesale to Mitsukoshi Limited. Tiffany & Co Japan now faces the risk of foreign currency fluctuations previously borne by Mitsukoshi Limited. Tiffany & Co Japan must now make the decision between basic hedging alternatives: Entering into forward agreements to sell yen for dollars or purchasing a yen put option.
Exposure
As Tiffany & Co’s receivable cash flows are now denominated in ¥ due at future date the firm now faces the foreign exchanges risks with uncertainty of the dollar equivalent of cash flows. Tiffany & Co. now face transaction, translation and operating exposures. Transaction exposure risk is observed in Tiffany’s deferred payment to Mitsukoshi of $25 million as this denominated in USD and cash inflows from Tiffany Japan will be denominated in yen. Translation risk represents foreign assets on financial statements as of July 30 1993 Tiffany & Co showed $7.7million in foreign assets. The most significant exposure that Tiffany will experience is operating risk due to the high amount in ¥ inflows. Tiffany & Co. will need to limit this exposure hedging these inflows in the medium term; however major currency movements will be factored in to the retail price in the long term.
Size of Exposure
The size of the exposure can be estimated from Mitsukoshi's wholesale purchases from Tiffany & Co. as % of Total sales as 15% in FY 1992 and total sales $486,396,000 with 27% of removed as Tiffany & Co as agreed to pay Mitsukoshi 27% of net sale for operation of boutiques. A figure of $95,759,212 was rounded up $100,000,000 for the sake of simplicity. As

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