The Walt Disney Company’s

The Walt Disney Company’s
Yen Financing

Motivations for Currency Swaps

1. Currency risk management

Match the currency exposure on the asset side with similar currency exposure on the liability side, or convert foreign currency earnings to domestic currency.

2. Arbitrage Profits based on comparative cost advantage

Cost European Apples American Apples

Beliz 1 ECU 0.75 dollars

Dan 1.25 ECU 1.5 dollars
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Beliz’s advantage 0.25 ECU 0.75 dollars

0.1875 dollars vs. 0.75 dollars 0.25 ECU vs. 1.00 ECU

Assuming 1ECU = 0.75 dollars

Comparative advantage = 0.75 – 0.1875 = 0.5625 dollars, or, = 1.00 – 0.25 = 0.75 ECU Beliz likes European apples and Dan likes American apples. Both like to eat three apples a day.

Without trading Beliz must spend 3ECU or 2.25 dollars
Without trading Dan must spend 4.5 dollars or 6 ECU

Beliz and Dan do an American/European Apple Swap

Beliz buys three American apples and Dan buys three European apples. They swap their fruits.

Beliz spends 3 X 0.75 dollars = 2.25 dollars or 3 ECU
Dan spends 3 X 1.25 ECU = 3.75 ECU or 2.8125 dollars

Dan pays 1 dollar (or 1.333 ECU) to Beliz

Beliz’s cost = 2.25 - 1.00 = 1.25 dollars or 1.666 ECU
Dan’s cost= 3.75 + 1.333 = 5.0833 ECU or 3.8125 dollars

Beliz saves 1 dollar (or 1.333 ECU) and Dan saves 0.6875 dollars (or 0.9166 ECU). Together they save 1.6875 dollars (or 2.25 ECU) which is equal to the comparative advantage per fruit of 0.5625 dollars (or 0.75 ECU) times 3 fruits.

Hedging Alternatives

1. Should Walt Disney Hedge (see Exhibit 4)

2. FX Forward Contracts

Available at low cost only until 2 year maturity (see Exhibit 5) due to the high bid-ask spread

Even if a quote is available, the dealers are unwilling to transact in any