Finance question – exchange rate

Tiffany Case


1.            In what way(s) is Tiffany exposed to exchange-rate risk subsequent to its new distribution agreement with Mitsukoshi?  How serious are these risks?


2.            Should Tiffany actively manage its yen-dollar exchange-rate risk?  Why or why not?


3.            If Tiffany were to manage exchange-rate risk activity, what should be the objectives of such a program?  Specifically, what exposures should be actively managed? How much of these exposures should be covered, and for how long?


4.            As instruments for risk management, what are the chief differences of foreign-exchange options and forward and futures contracts?  What are the advantages and disadvantages of each? Which, if either, of these types of instruments would be most appropriate for Tiffany to use if it chose to manage exchange-rate risk?


5.            How should Tiffany organize itself to manage its exchange-rate risk?  Who should be responsible for executing its hedges? Who should have oversight responsibility for this activity?  What controls should  be put in place?