1 . In what way(s) is Jewelry exposed to exchange-rate risk after itsnewВ distributionВ agreementВ withВ Mitsukoshi? В HowВ seriousВ areВ theseВ risks? Answer: Regarding 15% of (1992) revenue of $492mln or ~ $75mln will be gained inYen, but may have to be reported in money. At a Net Income (1992) of $25mln, the risks due to this exposure are significant. Data via exhibit six shows that ina 6-month period (Apr-Sep) exchange rates fluctuated as much as 10%. (from 133. 30 ВҐ/$ to a hundred and twenty. 07 ВҐ/$). A 10% downward fluctuation like this would translate into another of a drop in net results ($25mln -/- $75mln x 10%) to $16. 67mln, assuming everything else remains the same (e. g. all costs received in money, prices to consumersremain unchanged). 1 . About what ways can be Tiffany exposed to exchange-rate risk subsequent to its new distributionВ agreementВ withВ Mitsikoshi? В HowВ seriousВ areВ theseВ risks? Jewelry is confronted with foreign exchange risk by selling right to the Japanesemarket. В WhenВ theyВ soldВ wholesaleВ toВ Mitsukoshi, В MitsukoshiВ boreВ allВ theВ foreignВ exchangeВ risk. В UnderВ thisВ newВ agreementВ TiffanyВ isВ nowВ exposedВ toВ theВ volatileВ fluctuationsВ inВ theВ yen-dollarВ exchangeВ rate. В SinceВ TiffanyВ isВ makingВ profits in yen they have to convert the yen to dollars to take to their home country. В SinceВ theВ yenВ isВ thoughtВ toВ beВ overvalued inВ comparisonВ toВ theВ dollar, В theВ futureВ exchangeВ rateВ canВ decreaseВ Tiffany'sВ profits. В Also, В theВ extremeВ volatility in the exchange level creates significant uncertainty about what the future exchangeВ rateВ andВ profitsВ willВ beВ ifВ leftВ unhedged. В TheВ mostВ importantВ foreignexchange risk facing Tiffany is... 2 . В ShouldВ TiffanyВ activelyВ manageВ itsВ yen-dollarВ exchange-rateВ risk? В WhyВ or why not? Solution: Tiffany should certainly actively control its ВҐ/$ exchange charge risk for the subsequent reasons: 1 . The feasible impact on the result while described in the answer to issue 1is significant; 2 . There are strong symptoms (on a PPP-basis the Yen is highly overvalued)...


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