Tiffany \& Co., the prestigious U.S. luxury item retailer, sells all merchandise to its Japanese retail representative, Matsusoka. Matsusoka has recently changed its purchasing patterns with its suppliers like Tiffany from an as ordered basis to a strategy of building substantial inventories of merchandise. Matsusoka's reasoning is that, particularly for many luxury items, consumers buy on impulse and not based on price, taking into consideration that the goods are expensive to begin with, and that therefore they want to be able to buy and carry on the same day.

Tiffany invoices all sales to Matsusoka in Japanese yen, a standard policy of the firm. It believes it that it is best carrying the currency risk and allowing firms like Matsusoka to focus on sales rather than risk management. The new inventory purchase pattern means that Tiffany will now have a 90-day account receivable of \(Y 270\) million.

Tiffany wishes to consider the use of currency options to manage this exposure. Due to the limited budget of the Finance and Treasury divisions, it will need to finance these option purchases by writing offsetting positions. Current market conditions are as follows:

Construct and diagram a range forward that is \(=2 \%\) around the forward rate.

a. What precisely would Tiffany like the spot rate to be at the end of the 90 -day period:

b. What would be the U.S. dollar proceeds, net of all premiums, if this spot rate did occur?

c. What would be the minimum dollar proceeds if the spot rate moved against Tiffany?
Construct and diagram a range forward that is \(\pm 5 \%\) around the forward rate.

a. What precisely would liffany like the spot rate to be at the end of the 90 day period?

b. What would be the U.S. dollar proceeds, net of all premiums, if this spot rate did occur?

c. What would be the minimum dollar proceeds if the spot rate moved against Tiffany?

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Spot exchange rate: 108.20/$ 90-day forward rate: 107.88/$ 90-day Eurodollar deposit rate: 3.3750% 90-day Euroyen deposit rate: 2.1875% 90-day yen/dollar volatility quote: 11.8%