Business continuously expands into global organizations finding it necessary to pay close attention to the foreign exchange market. These companies must follow the foreign exchange market closely and should develop appropriate hedging strategies to protect them. Exchange rate risk is the unexpected exchange rate that may cause an organization to lose or gain income. Currency hedging is a method of minimizing the exchange financial rate risk within an international organization. Global Companies involved in operations should have good understanding of the financial risks that the company could go through prior to starting its venture.…
organizes one to four week trips for high school students and their teachers. The College division…
To manage exchange rate risk activity, Tiffany’s objectives should be to minimize foreign exchange rate risk and lower counterparty risks. We want to minimize these risks because Tiffany & Co. is selling goods that are denominated in US dollars, but sold for yen in the Japanese market. The objective of this program is to prevent the depreciation of the yen against the US dollar by hedging the currency. The expected Japanese sales of Tiffany & Co. should be actively managed by purchasing hedging contracts continuously on expiration of previous contract.…
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 “correct answer.” The reasoning is more important.…
1. Should AIFS hedge at all?.......................................................... 2. Proportions of the expected costs that should be covered….. 3. Proportions of forwards and options use……………………..…
4) As instruments for risk management, what are the chief differences of foreign-exchange options and forward or future 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 ot manage its exchange-rate risk?…
To illustrate exchange-rate risk management through two conventional hedges—a forward-contract hedge and a money-market hedge.…
* It has two major divisions: The Study Abroad College and the High School Travel division. Both are managed by Archer-Lock & Tabaczynski respectively.…
3. What would happen with a 100% hedge with forwards? A 100% hedge with options? Use the forecast final sales volume of 25,000 and analyze the possible outcomes relative to the "zero impact" scenario described in the case.…
15.5) Explain how corporations can use range-forward contracts to hedge their foreign exchange risk when they are due to receive certain amount of a foreign currency in the future.…
This chapter provides an overview of currency derivatives, which are sometimes referred to as “speculative.” Yet, firms are increasing their use of these instruments for hedging. The chapter does give speculation some attention, since this is a good way to illustrate the use of a particular instrument based on certain expectations. However, the key is that students have an understanding why firms would consider using these instruments and under what conditions they would use them.…
Tiffany has decided to sell direct in Japan as opposed to selling wholesale to Mitsukoshi and Mitsukoshi selling to the public. In this agreement Tiffany will give Mitsukoshi 27% of net retail sales in exchange for providing the boutique facilities, sales staff, collection of receivables, and security for store inventory. This new agreement exposes Tiffany to the fluctuation in the yen-dollar exchange rate. Therefore, they are considering two basic hedging alternatives to reduce exchange-rate risk on their yen cash flows. The first alternative was to sell yen for dollars at a predetermined price in the future using a forward contract. The second alternative was to purchase a yen put option allowing them to exercise their option only if it was more profitable in the future at the future spot rate. Two more alternatives that we think are appropriate are a synthetic forward using options and a synthetic forward using interest rate parity. Furthermore, Tiffany needs to understand the hedging alternatives and determine what, if any, strategy is right for them.…
If hedging currency risk is to add value to the stakeholders of the firm, then hedging must impact either expected future cash flows or the cost of capital or both.…
Since the acceptance of Dozier Industries’ bid, the company CFO has been exploring the methods available to best manage the exchange risk associated with the award payment being dispersed in British Pounds (GBP). He originally considered a forward contract or a spot contract, but is now investigating how currency options could help hedge against uncertain foreign exchange exposure. The CFO needs to decide whether or not options contracts might provide some benefit to hedge the currency risk.…
What are the costs of alternatives for reducing short term foreign currency risk? Assume OSG has an account receivable of US$1 million. Use the information provided in Appendix 1 for this account payable case of US$1 million to a US company. Which of the possible hedging methods presented in the case should OSG use if they expect the dollar to depreciate versus the yen during the next three months? Use the information provided in Exhibit 10.…