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Tiffany & Company (1993)

Tiffany & Company Case Analysis
I. Statement of Issue
Should Tiffany hedge against translation risk from their Japanese subsidiary?

II. Relevant Facts
• Establishment of Tiffany-Japan with new responsibility of setting yen prices and managing currency risk.
• Eurodollar 3-month forward rate 3.25%
Euroyen 3-month forward rate 3.1875
• Yen/Dollar spot rate ¥106.3500
3-months forward ¥106.3300
• 94 SEP call price 1.99 (100ths of a cent per yen, ¥6,250,000/contract)
• 93.5 SEP put price 2.03 (100ths of a cent per yen, ¥6,250,000/contract)
• First six months of fiscal year, dollar depreciated from 124.80 to 106.35 or 3.15% per month. Three-month forward quotes also reflect dollar depreciation from 124.865 to106.33 or 3.16% per month.
• Technical chart indicates dollar depreciation.

III. Relevant Assumptions
• Management policy to grow aggressively using retained earnings.
• Tiffany sales: one percent of $20 billion Japanese jewelry market or approximately $200 million
• Zero growth assumption due to restructuring and Japanese perception of management.
• Purchase of inventory from Mitsukoshi through Tiffany-Japan, therefore, in yen and no currency risk.
• Net profit margin of six percent. This is arrived from reviewing the past trend of selected ratios in Exhibit 3. The current 3.2% reflects the buyout, etc. and is probably low. However, the trend has been downward and six percent reflects continuance of the trend as management responds to the buyout.

IV. Conclusion/Recommendation
• No hedge since dollar is expected to depreciate against the yen. No translation risk since appreciating yen will convert to more dollars in the translation to the home currency.
• If hedging was desired for forward rate analysis of a depreciating dollar, hedge by buying 26 SEP 94 calls. This isn’t relevant for Tiffany’s risk exposure, however.
• For Tiffany’s translation risk (depreciating yen), the best hedge would be to buy 93.5 SEP puts for 2.06 or...