Walt Disney Yen Financing Essay

1439 Words Sep 9th, 2010 6 Pages
1. Should Disney hedge its yen royalty cash flow? Why or why not? If so, how much should be hedged and over what time period?

Yes, Walt Disney Company should hedge its royalty cash flow to protect against currency fluctuations. The company has revenues in Yen and does not have expenses in Yen. Thus it would be converting the Yen to Dollar and so is exposed to foreign exchange risk. The value of Yen has declined recently and it is difficult to forecast what the value could be in the future. Also currency speculation should be left to speculators and Disney should not play on the exchange rate. It would be wise to reduce the risk due to changes in exchange rate. The royalty receipts form a significant part of the pre tax income of
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Yen 15 billion 10 year bullet loan
The advantages are • The time period would be 10 years • The interest rate would be the Japanese prime rate
The disadvantages are • Since it is a bullet loan it does not help in hedging the year on year income • Requires lump sum payment on maturity • It is more expensive than the SWAP transaction • Has upfront fees

Other hedging methods such as issuing longer maturity Eurodollar note was not feasible because of the Disney’s temporarily high debt ratio. Also, Euroyen bonds are not an option because Disney was not eligible to issue them under Japanese regulations.

3. In light of the various other techniques for hedging currency exposures why the market for currency swap does exists? Who benefits and who looses in such an agreement? Can a swap really create value for a corporation? And if so where does the value come from? What risks does the swap carry for the various parties involved?

The market for swap exists since it allows parties to access market which they might not be able to do directly. Also swaps are customizable between parties and so are more flexible. The duration of

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