Walt Disney Yen Financing
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 Disney and any adverse movement would impact the financial position of Disney.
The maximum amount and the period should be the Yen royalties that accrue to Disney. At the moment the amount is Yen 8 billion. The royalties are expected to grow for all times in the future and so the hedging should be for the maximum maturity available which is 10 years. At the minimum, Disney may Disney may want to take enough money so as to reduce the debt to capitalization ratio back to 20% which now stands at 32%.
The expected yen revenue stream of more than ¥8 billion every year would create
2. Assuming a hedge is desirable what hedging techniques available to the treasurer? What are the advantages and disadvantages of each?
The various hedging techniques available and the advantages and disadvantages are :
1. Currency Options – In this Disney could buy dollar yen options allowing Disney the right to buy dollars against yen at a predetermine rate or could sell Put options allowing Disney to sell yen for dollars at a predetermined rate.
The advantages of options are • It gives the right but not the obligation. If the Option is out of the money it need not be exercised. • Options have an unlimited upside but limited downside so
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 Disney and any adverse movement would impact the financial position of Disney.
The maximum amount and the period should be the Yen royalties that accrue to Disney. At the moment the amount is Yen 8 billion. The royalties are expected to grow for all times in the future and so the hedging should be for the maximum maturity available which is 10 years. At the minimum, Disney may Disney may want to take enough money so as to reduce the debt to capitalization ratio back to 20% which now stands at 32%.
The expected yen revenue stream of more than ¥8 billion every year would create
2. Assuming a hedge is desirable what hedging techniques available to the treasurer? What are the advantages and disadvantages of each?
The various hedging techniques available and the advantages and disadvantages are :
1. Currency Options – In this Disney could buy dollar yen options allowing Disney the right to buy dollars against yen at a predetermine rate or could sell Put options allowing Disney to sell yen for dollars at a predetermined rate.
The advantages of options are • It gives the right but not the obligation. If the Option is out of the money it need not be exercised. • Options have an unlimited upside but limited downside so