Finance: United States Dollar and Exchange Rate Risk Essay

Your write-up should be eight to ten pages (double-spaced). If you provide information outside the encase or the textbook, rehearse a footnote to indicate the source. You can use pictures, but no more(prenominal) than four, and each figure should be no more than half a page in size. 1. administrator Summary. Briefly describe the history and business of Tiffanys Co. What type of decision did the company lose to provoke in 1993? Why was the decision important? 2. History of Japanese Yen. Describe the historical throw physique between Japanese Yen and U.S. dollar over time. Focus on the big changes and what was the flip send in (and years before) July 1993. 3. To Hedge or Not? Do you think Tiffany should actively dish out its yen-dollar exchange rate risk? Why or why not? Explain the benefits and costs of hedge.4. What to Hedge? If Tiffany were to manage its exchange rate risk, then identify what exposures should be managed via such a hedging program (e.g., remit sales, he dge gross profit, or hedge cash flows, etc.). Explain why. 5. Forward or Options? If Tiffany were to hedge the yen-dollar exchange rate risk, it can choose either forward contracts or survivals. Explain how Tiffany can hedge victimization forward contracts? How to hedge development options? The available forward contracts and options are described in Exhibit 8, assuming Tiffany can only use those derivatives to hedge. Based on what you have learned in this course, what are the pros and cons of using options to hedge compared to using forward contracts to hedge?6. Your Decision. If you were CFO of Tiffany, what would you have done in July 1993? No hedging at all? Or hedging? If you decided to hedge, quantify how much of these exposures should be covered and for how long. You have to thatify your answers. Note that there is no correct answer. The reasoning is more important. You should obtain information from Tiffanys financial statements (e.g., Exhibit 3) and use information in the case (e.g., on page 3 it says that Tiffanys sales accounted for only 1% of the $20 billion Japanese jewelry market) and then shoot an educated guess on what is the exposure and how much you want to hedge and how (i.e., using forward contracts or options or a combination.)Again, if two groups have similar write-ups, both write-ups will receive a grade of 0. Also, you should provide an answer to each specific question. Quantify questions 5 and 6. Otherwise you have to rewrite.Finally, I just want to clarify the option prices in Exhibit 8 in case 2.The left plank says Calls it means these are anticipate options on U.S. dollars, and these are from Japans point of view, not from U.S.s point of view. So the left panel gives you the right (but not obligation) to buy U.S. dollar with Yen (i.e., lot Yen for dollar), and that is what you want to use. Do not use the right panel.You may ask, how come the case says that Tiffany should use Yen put options to hedge? Well, a Yen put option IS a dollar call option, why?A call option on US dollar, written at an exercise price in terms of Yen, is a put option on Yen, written at an exercise in terms of dollar. For example, in Exhibit 8, the three months call option on dollar with a require price of 92Yen has a premium of 2.52 100ths of a cent per yen (i.e., premium is 0.000252$/yen). This call option gives you (mainly Japanese investors) the right to buy $ using Yen, that is to say, it gives you the right to sell Yen at (1/92)$, therefore, this is a put option for Yen from U.S. investors point of view.Bottom line, since Tiffany has Yen exposure, so you want to sell Yen as financial manager of Tiffany, so you should use the left panel, not the right panel.