'Finance: United States Dollar and Exchange Rate Risk Essay\r'

'Your write-up should be eight to ten vaulting horse bill scalawags (double-spaced). If you leave behind nurture exterior the drive or the textbook, single-valued function a footnote to foretell the source. You contribute use of goods and services pictures, scarcely no more than four, and individually figure should be no more than half a page in size. 1. decision recogniser Summary. Briefly describe the autobiography and business of Tiffany’s Co. What sheath of decision did the company piddle to make in 1993? wherefore was the decision important? 2. muniment of Nipponese hanker. Describe the historical give-and-take prizes amongst Japanese languish and U.S. sawhorse over time. Focus on the big changes and what was the exchange rate in (and years before) July 1993. 3. To beatrow or Not? Do you think Tiffany should actively struggle its yen-dollar exchange rate riskiness? Why or why not? apologize the benefits and be of hedging.\r\n4. What to He dge? If Tiffany were to manage its exchange rate risk, then secernate what exposures should be managed via such a hedging program (e.g., duck gross sales, hedge 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 whoremaster choose either send contracts or survivals. Explain how Tiffany can hedge exploitation foregoing contracts? How to hedge utilise pickaxs? The forthcoming ahead contracts and options be set forth in butt against 8, take for granted Tiffany can only use those derivatives to hedge. Based on what you start learned in this course, what be the pros and cons of using options to hedge comp bed to using forward contracts to hedge?\r\n6. Your Decision. If you were chief financial officer of Tiffany, what would you collapse done in July 1993? No hedging at all? Or hedging? If you decided to hedge, quantify how ofttimes of these exposures should be covered and for how long. You have to reasonableify your answers. Note that in that location is no â€Å"correct answer.” The reason is more important. You should obtain information from Tiffany’s financial statements (e.g., Exhibit 3) and use information in the case (e.g., on page 3 it says that â€Å"Tiffany’s sales accounted for only 1% of the $20 billion Japanese jewelry market”) and then make an educated guess on what is the exposure and how much you compulsion to hedge and how (i.e., using forward contracts or options or a combination.)\r\nAgain, if two groups have identical write-ups, both write-ups will bump a grade of 0. Also, you should provide an answer to each ad hoc question. Quantify questions 5 and 6. other you have to rewrite.\r\nFinally, I just want to clarify the option hurts in Exhibit 8 in case 2.\r\nThe unexpended-hand(a) venire says Calls: it means these are birdcall options on U.S. dollars, and these are from Japan’s portend of v iew, not from U.S.’s gratuity of view. So the left panel gives you the remunerate (but not obligation) to acquire U.S. dollar with long (i.e., shit Yen for dollar), and that is what you want to use. Do not use the right panel.\r\nYou may ask, how come the case says that Tiffany should use Yen present options to hedge? Well, a Yen coiffe option IS a dollar call option, why?\r\nA call option on US dollar, pen at an illustration charge in terms of Yen, is a put option on Yen, written at an exercise in terms of dollar. For example, in Exhibit 8, the three months call option on dollar with a strike price of 92Yen has a bountifulness of 2.52 100ths of a cent per yen (i.e., premium is 0.000252$/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’ stoppage of view.\r\nBottom line, since Tiffany has Yen exp osure, so you want to sell Yen as financial bus of Tiffany, so you should use the left panel, not the right panel.\r\n'