Hedging future yen inflows from Disney Tokyo is being taken into consideration by Walt Disney Company. Techniques using FX Forwards, swaps, and Yen term borrowings are being evaluated. An unusual but attractive and potentially effective solution was forwarded and that is, for Walt Disney Company to use ECU Eurobonds. These may then be swapped into a Yen liability.
W. Carl Kester, William B. Allen
Harvard Business School (XLS066-XLS-ENG)
Jan 9, 1987 (Revision: Sep 5, 1991)
Case questions answered:
- Should Walt Disney Company hedge its yen royalty cash flow? How can cash-flow hedging increase value? If Disney decides to hedge, then how much should be hedged and over what time frame?
- Assuming a hedge is desirable, what hedging techniques are available to the treasurer? What are the advantages and disadvantages of each? How would Disney’s value be impacted by hedging cash-flows through fairly priced options?
- Can a swap really create value for a corporation? If so, how? What would be the source of the value? What swap risks exist for all of the parties involved?
- Evaluate Goldman’s proposal for an ECU bond issue accompanied by an ECU/yen swap. How does its “all-in” yen cost compare to that of the proposed yen term loan? Is it superior to hedging using outright forwards (Note: “all-in” cost generally refers to that discount rate which equates the present discounted value of future debt service payments with the financing proceeds less front-end fees [i.e., internal rate of return], expressed as an annual rate).
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Case answers for Walt Disney Company's Yen Financing
1. Overview – Walt Disney Company’s Problem
In 1983, the Walt Disney Company opened the Tokyo Disneyland, which was operated by a separate Japanese company who paid royalties to Walt Disney. The internationalization of their operations led to a growing concern over Disney’s currency exposure, especially as the yen had recently depreciated against the dollar.
To reduce their risk exposure, Disney is considering whether they should engage in hedging, and if so, which strategy to adopt. This report evaluates the attractiveness of the various hedging strategies available and provides a recommendation.
2. The Decision to Hedge
Walt Disney Company received over ¥8 billion of royalty receipts in yen from their Japan operations in the fiscal year 1984. This is expected to grow at a rate of 10% to 20% per year over the next few years as the new theme park…