In the context of Harvard Business Case Tiffany & Co. 1993 our team will focus on the Identification, Measurement, Management of the JPY/USD exchange rate in terms of Economic, Transaction and Translation Exposures for Tiffany & Co. 2. Economic Overview: Japan in 1993: In the decade of 1960s Japan faced various trade frictions with the USA and Europe in connection with rapid expansion of industrial products exports. In 1971, the USA decided to end the convertibility of the USD into gold. Therefore the fixed exchange rate regime (namely Bretton Woods System) was not in place anymore. Japan’s reaction was to float its exchange rate from JPY 360 to JPY 308 in December 1971. In February 1973, the Japanese yen moved to the floating exchange-rate system. The Japanese Economy faced a steady growth until October 1973, as the Israeli-Arab War in this year lead to the first oil crisis, and it triggered a high inflation. As a result, Japan's economy recorded negative growth in 1974 for the first time in the post-war period
Table of contents
1. Preface
2. Economic Overview: Japan in 1993
3. FX-Exposure
3.1 Economic Exposure
3.2 Transaction Exposure
3.3 Translation Exposure
4. Organizational consequences for Tiffany & Co. on the basis of our recommendation
5. Update on Tiffany’s FX-Exposure
Objectives and Core Topics
The primary objective of this paper is to analyze the financial risk management strategies for Tiffany & Co. in 1993, specifically focusing on the identification, measurement, and management of exposure to JPY/USD exchange rate fluctuations.
- Macroeconomic environment of Japan in 1993.
- Evaluation of Economic, Transaction, and Translation exposure.
- Strategic hedging recommendations for foreign exchange risk.
- Organizational treasury guidelines for multinational currency management.
Excerpt from the book
3.2 Transaction Exposure
The typical Transaction FX-Risk arises when a party enters an obligation in a foreign currency on a predetermined date, but settles later (after a possible change in exchange rate). The Transaction Exposure at Tiffany Japan consists of two main components:
• Deferred Payment of USD 25m on inventory that was previously sold to Mitsukoshi (repaid in Yen with interest of 6% p. a. over the next 4.5 years)
• Warehouse Value USD 62.5m (will be repurchased during the next 4.5 years with no interests)
Both exposures sum up to a total current liability position (accounts payable) of USD 87.5m or JPY 9.4 bn.. Due to netting effects with the hedged net income during the following 4.5 years, the Transactional Exposure can be offset. In general, the residual FX-Exposure can by hedged with financial instruments such as forwards, money market hedges or futures on a selective basis.
Summary of Chapters
1. Preface: Outlines the scope of the case study, focusing on the management of exchange rate risks for Tiffany & Co.
2. Economic Overview: Japan in 1993: Provides a historical context of the Japanese economy, including trade frictions, inflation, and the transition to a floating exchange rate system.
3. FX-Exposure: Categorizes and analyzes the company's financial exposure into Economic, Transaction, and Translation components.
4. Organizational consequences for Tiffany & Co. on the basis of our recommendation: Discusses the necessary treasury policies and internal structures required to effectively implement the proposed hedging strategies.
5. Update on Tiffany’s FX-Exposure: Briefly reviews the company's performance in the Japanese market in the years 2002 to 2004.
Keywords
FX-Exposure, Japan, Tiffany & Co., Economic Exposure, Transaction Exposure, Translation Exposure, Hedging, Currency Risk, JPY/USD, Treasury, Financial Instruments, Risk-sharing, Exchange Rate, Macroeconomics, Capital Markets
Frequently Asked Questions
What is the primary focus of this case study?
The paper examines the financial challenges faced by Tiffany & Co. in 1993 due to the JPY/USD exchange rate volatility and how the company manages its foreign currency exposure.
What are the three main types of FX-Exposure discussed?
The study analyzes Economic Exposure (medium to long-term), Transaction Exposure (short-term), and Translation Exposure (accounting perspective).
What is the primary objective of the proposed financial strategy?
The goal is to stabilize cash flows and protect the company's value from unanticipated fluctuations in the yen-dollar exchange rate.
Which scientific methods are applied to assess the risks?
The authors use scenario analysis, present value (PV) calculations, and assumptions regarding WACC and terminal values to model the impact of various exchange rate movements.
What does the main body of the text cover?
It provides an economic history of Japan, detailed breakdown of Tiffany's specific inventory and loan liabilities, and strategic recommendations for hedging, such as natural hedges and forward contracts.
Which keywords best describe this research?
The paper is centered around terms like FX-Exposure, Hedging, Currency Risk, JPY/USD, and Treasury management.
Why is Tiffany's Asset Exposure considered negligible in the study?
The study argues that because Tiffany's inventories (gold and diamonds) are denominated in USD globally, they are not highly correlated with the JPY/USD exchange rate movements.
What recommendation does the team make regarding balance sheet hedges?
Based on their analysis, the authors conclude that Tiffany Japan lacks significant asset positions prone to translation risk, and therefore, they advise against implementing balance sheet hedges.
- Quote paper
- Andre Merz (Author), Philipp Hauger (Author), Ahmet Kaya (Author), Julia Modlinskaia (Author), Hagen Puschmann (Author), 2005, Harvard Business School Case Study Tiffany & Co. - 1993, Munich, GRIN Verlag, https://www.grin.com/document/54657
