Finance

Q1. Internalization
The business model used by Tiffany Company is the distribution model which involves a chain of intermediaries like distributors and retailers. The distribution channels used by this company include U.S Retail, Direct Marketing and International Retail. It is also evident that the company had segmented its market into market niche so as to reach all the customers together with increasing its sales.  Tiffany Company used also used internalization as a method of trading its securities.

Exchange rates fluctuations and political and social issues are some of the risks which emerge from business internalization. A fluctuation in exchange rates is an economic risk and results to a cyclical pattern in the economic growth. Brokers who trade securities during these periods are subject to risks of losses. Instability in the economic growth leads to inflation which increased prices and hence low demand for the securities. Political and social issues have a great impact on the economy and especially when it comes to buying of securities. Politicians have a great influence on security trading since most of they are the law makers.

The society also has an influence in security trading since they decide on where and how to purchase the securities. The companys internalization progressed well with the company shares being held by shareholders and this made the company to be profitable where it grew and was able to generate funds internally. As a result the company offered its security stock to the market for sale. The process of internalization by Tiffany Company led to reduction of company risks. The fact that the stock of Tiffany Company was held by shareholders made the company profitable in that it was able to open 16 stores which accounted for 50 of the total sales.

This made the company be profitable in such a way that they were able to generate a 100 million non-collateralized revolving credit facility available at interest rates based upon Eurodollar rates, certificate of deposit or money market rates. It also maintained a relatively moderate level of cash dividend so that it may be able to retain majority of its earnings. By doing this the company was able to escape some risks associated with fluctuations in exchange rates.

Q4. Risk Management instruments
Foreign exchange option is a financial instrument where the owner is given the right to exchange money into another currency at the pre-agreed rate of exchange and at a specific date. Future contracts on the other hand is a unvarying contract which is signed by two parties to either buy or sell a certain asset of a given quantity and quality at a specified date and a specified price. They are not direct securities like bonds and stocks but a type of derivative contract. Foreign exchange rate is an instrument used to manage commodity risks while future contracts are instruments used to manage price risks.

The advantages of future contract include the price is determined by forces of demand and supply, it gives the asset holder a duty to make the delivery depending on the asset terms and it does not give the buyer any responsibility to establish a position which was previously held by the seller. The disadvantages of future contracts include The disadvantages of future contracts include its a legal obligation, some standardized features may be impossible to obtain and one must pay a deposit before engaging in future contracts.

The advantages of foreign exchange include the trading is done through an electronic media, it the most liquid market option, its capable of trading volumes of commodities and the trader has the right to exchange one currency into another. Its disadvantages include products traded using this instrument carry high chances of risk, the investor have a limited liability, one currency can dominate the other and the owner does not have an obligation to exchange one currency into the other.

Tiffany Company should use foreign exchange rate to manage exchange-rate risk. By using this instrument the company will be in a position to exchange its currency at an agreed period and agreed rate of exchange. The right to agree on the rate of exchange could have helped the company to manage risks which result from fluctuations in exchange rates. That is the company will only be able to exchange its currencies only when the rates are favorable for them hence reducing exchange-rate risks.