Walt disney company's yen financing
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 option existed only for maturities of two years or less, which is much less than the time scale of 10 years that Walt Disney was considering. Same issue also applies for the second solution, (2) the future contracts which would allow the company to exchange yen for dollar at a pre-defined rate. Also this issue would still persist if Walt Disney would like to (3) convert its existing dollar debt into yen liability since its Eurodollar note issues matured in one to four years and an attractive rate is hard to find. Moreover this option does not provide any additional cash. The fourth option of (4) FX forward contracts from the bank which could provide long-dated FX forward rate would limit the company's future credit capacity since the bank would consider these contracts as a part of their total exposure. (5) The Eurodollar debt has long maturity as well, but the company's current debt ratio is already too high, and the (6) Euroyen bonds are not possible for this case due to restriction in the form of regulation from Japanese government.
There are two available options for Walt Disney, (7) creating a yen liability through loan from a Japanese bank, or (8) an ECU/yen swap proposed by Goldman Sachs. After calculating the IRR of each
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 option existed only for maturities of two years or less, which is much less than the time scale of 10 years that Walt Disney was considering. Same issue also applies for the second solution, (2) the future contracts which would allow the company to exchange yen for dollar at a pre-defined rate. Also this issue would still persist if Walt Disney would like to (3) convert its existing dollar debt into yen liability since its Eurodollar note issues matured in one to four years and an attractive rate is hard to find. Moreover this option does not provide any additional cash. The fourth option of (4) FX forward contracts from the bank which could provide long-dated FX forward rate would limit the company's future credit capacity since the bank would consider these contracts as a part of their total exposure. (5) The Eurodollar debt has long maturity as well, but the company's current debt ratio is already too high, and the (6) Euroyen bonds are not possible for this case due to restriction in the form of regulation from Japanese government.
There are two available options for Walt Disney, (7) creating a yen liability through loan from a Japanese bank, or (8) an ECU/yen swap proposed by Goldman Sachs. After calculating the IRR of each