Exchange Rate Risks - Tiffany - Case Study Example

The overvaluation of the Yen could lead to a crash and sudden disruption of services within the organization.

Tiffany needs to look for a way of managing its Yen-dollar exchange-rate risk because it will determine how well it will react to the growth of its shares after it agrees with Mitsukoshi. This will also be a good way of evaluating its shares and ensuring that in the event of the cashing of Yen, the risks will not be transferred to the investors or the clients. It must retain worth without having to place its clients at risk of losing out (Eun & Resnick 2011:104). This way, Mitsukoshi will value its services and offer better returns.

The aim of managing the risks is to adopt new measures that will induce financial hedging and improve operating exposure. It will also act as an opportunity to use policies flexibly in sourcing other forms of supply chain management ventures and diversify its options to spread the risks elsewhere. This will also aim at managing the profits and maximizing them, as well as looking for different alternatives that will work well towards the minimization of the risks. Overall, the goal is to ensure that the fluctuations do not induce changes in the current value of the firm but retains a huge margin that shows its profitability all through. The risks that should be covered are in trade, inward and outward remittances, as well as overseas assets the company owns. These should be covered for a short while as the company looks for alternatives. Any surplus cash balances and subsidiaries in overseas accounts should be dealt with immediately to avoid incurring losses that could harm the company’s liabilities. Transaction and contingent exposures best explain the position of this company and require immediate handling (Eun & Resnick 2011:119-122).

A foreign exchange option allows an organization to get the right but not the obligation to exchange one currency that it has in abundance for another at a pre-agreed value on a specified date. Forward and future contracts allow people to sell or buy specific asset types to others at a particular time and a stipulated price. Currency options are flexible and could come in your favor. The disadvantage is that the lack of obligation may hurt one side of the bargaining chip and give lesser rates. Forward and future contracts require no handling fees, book forward exchange contracts have different currencies to transact in, and the facility limit is restored after each contract takes up. The demerit is that the guaranteed exchange rate could be too low and result in losses (Eun & Resnick 2011:125-6). The forward and future contracts would be advantageous for Tiffany at this stage.

The accountant or the CFO should take up the management of risks. This will ensure the rules are followed and the organization can assure its investors of stability. It has to manage its exposure by using hedging strategies that reduce the exchange rate risks. This will be essential in reducing the risks. To avoid future risks, it should conduct its research well and pursue greater inelasticity by differentiating its products (Eun & Resnick 2011:129). Read More