Walt disney company's yen financing

1838 Words Oct 8th, 2014 8 Pages
CASE STUDY

THE WALT DISNEY COMPANY'S YEN FINANCING

Alexandra Molnár

Laure Vigneron

Manuel Aguilee

Pimprapai Lertamornkitti

Pranav Goyal

EXECUTIVE SUMMARY

Walt Disney, an American leisure and entertainment company, receives royalty payment from Tokyo Disneyland every year. The royalties were denominated in yen and were constantly growing and becoming significant for the company (8 billion Yen in 1984, with 10-20% projected growth). However, the depreciation of the yen against the dollar could incur the risk of devaluation on the royalties to be received, indicating that Walt Disney should perform hedging.

Different solutions are available. First is to (1) buy options to sell yens for dollars or to buy dollars with yen. However this
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Anderson to hedge this risk of foreign exchange. Mentioned below are the different options that were available for Mr. Anderson to hedge this risk.

First solution that the company could have used is to buy/sell options. But the problem Mr. Anderson faced for this was the short-term nature of this solution. Indeed, such options existed with at best a maturity of two years, which was not good enough for the timescale he was considering (10 years horizon).

The Future Contracts option, which would permit the Walt Disney Company to exchange Yens against Dollars at a pre-defined rate (and would protect them from the on-going depreciation), is apparently the same issue: it is impossible to find contracts with maturities of more than two years.

The Walt Disney Company could have entered a foreign currency swap as they did last year by trying to convert part of their dollar debt into a yen liability. This type of hedge was short-term since Disney's Eurodollar note issues matured in one to four years. The problem regarding such hedging was first it was very difficult to find attractive yen swap rates for such maturities (one to four years), and secondly it would not provide any additional cash to Disney, which is something Mr. Anderson was looking for.

That short-term issue could have been dealt with FX forward contracts. Unfortunately, the banks would consider these contracts as a part of their total exposure
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