Finance: United States Dollar and Exchange Rate Risk Essay

Your write-up should be eight to ten pages (double-spaced). If you provide culture outside the field of study or the textbook, put on a footnote to advise the source. You can use pictures, but no more than four, and each go in should be no more than half a page in size. 1. Executive Summary. Briefly describe the history and business of Tiffanys Co. What cause of termination did the company have to make in 1993? Why was the decision important? 2. History of Japanese ache. Describe the historical exchange position between Japanese Yen and U.S. clam over time. Focus on the big changes and what was the exchange rate in (and years before) July 1993. 3. To Hedge or Not? Do you think Tiffany should actively manage its yen-dollar exchange rate risk? Why or why not? Explain the benefits and be of hedging.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., defer sales, table megascopi c profit, or dip 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 options. Explain how Tiffany can hedge use forward contracts? How to hedge using options? The available forward contracts and options ar described in salute 8, take for granted 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 justify your answers. Note that there is no refine 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 pa ge 3 it says that Tiffanys sales accounted for only 1% of the $20 billion Japanese jewelry market) and then make an educated guess on what is the exposure and how much you extremity to hedge and how (i.e., using forward contracts or options or a combination.)Again, if two groups have similar write-ups, both write-ups willing receive a grade of 0. Also, you should provide an answer to each peculiar(prenominal) question. Quantify questions 5 and 6. Otherwise you have to rewrite.Finally, I just lack to clarify the option prices in Exhibit 8 in case 2.The left panel says Calls it means these are handle options on U.S. dollars, and these are from Japans point of view, not from U.S.s point of view. So the left panel gives you the correctly (but not obligation) to deprave U.S. dollar with Yen (i.e., sell Yen for dollar), and that is what you want to use. Do not use the right panel.You may ask, how come the case says that Tiffany should use Yen gear up options to hedge? Well, a Yen point option IS a dollar call option, why?A call option on US dollar, pen at an exercise price in footing of Yen, is a put option on Yen, written at an exercise in terms of dollar. For example, in Exhibit 8, the three months call option on dollar with a strike price of 92Yen has a premium of 2.52 100ths of a cent per yen (i.e., premium is 0.000252$/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.